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14 August 2023
15 min
In today’s fast-paced business landscape, technology has become a key driver of success. However, competition for talents and rising costs put some companies overboard. That’s how R&D center outsourcing emerged as a game-changer for businesses seeking remarkable growth and a competitive edge. Such IT giants as Google, Samsung, People.ai, and ThredUp have already embraced this model to elevate their business.
I’m Sergey Ovcharenko, CBDO at Alcor, a professional IT recruitment & R&D services provider in Eastern Europe. Delivering R&D center services for over a decade, I would like to share our knowledge and experience on the matter. In this article, you’ll find out whether R&D outsourcing is right for your business. I’ll also share some valuable practices and tips to avoid possible risks. So, without further ado, let’s get started!
Software R&D Outsourcing: Is It a New Trend?
Adaptability is the name of the game for business executives. Those who fail to keep up with market shifts and economic turbulence risk falling behind the competition. As a result, the battle for top talent has intensified, with finding competent software developers proving to be a challenging task. A whopping 60% of tech executives cite talent shortage as the major obstacle in an effective scale-up. This issue is especially acute in such areas as artificial intelligence, data engineering, cybersecurity, data analytics, and the Internet of Things (IoT). In addition, 73% of global CIOs are concerned about IT talent attrition amidst the “Great Resignation.” So, how can businesses navigate these challenges and find a way out?
To address the talent gap and at the same time keep costs in check, numerous IT companies have embraced the practice of software R&D outsourcing. Basically, it involves hiring dedicated software developers in offshore or nearshore destinations via an experienced vendor. R&D outsourcing can be that silver bullet for many pressing issues, as it helps companies:
- access wider pools of skilled programmers;
- significantly cut development and labor costs;
- achieve swift business upscaling;
- enter new markets with ease;
- and attract more investment.
No wonder why the engineering R&D services outsourcing market has experienced steady growth over the past decade. And the trend shows no signs of slowing down in 2023 and beyond. Remarkably, about 60% of IT leaders plan to increase R&D center outsourcing over the next three years. This surge in demand will drive the global R&D outsourcing market to a remarkable 8.7% CAGR, reaching $11.69 billion in 2027, up from 7.7 billion back in 2022.
3 Reasons to Outsource a Software R&D Team
1. Lack of software developers
Finding tech talents is a challenging task in today’s IT market. The USA, in particular, has the biggest struggles in this regard. According to ManpowerGroup research, 69% of American IT companies struggle to fill tech positions due to the talent shortage. In this case, engaging a software R&D team abroad is a great way out.
For example, you could consider Eastern Europe which boasts an enormous pool of qualified software engineers with different expertise levels and skill stacks. Some of the most prominent offshoring locations here are Poland, Romania, Bulgaria, and Ukraine. Developers in these countries possess well-rounded STEM education, an average of 3-5 years of professional experience, and high skill recognition in various rankings like SkillValue, TopCoder, and Harvard Business Review, etc. This makes R&D outsourcing to Ukraine and other Eastern European locations an ideal way out for many foreign IT companies.
2. The need to scale up quickly
Since the tech business is developing at an unprecedented pace, you might have already felt the pressing need for more developers to work on your product or deliver new solutions to it. The key to successful product development lies in allocating the workload efficiently among IT specialists, making new talent an essential requirement in the short term. That’s when outsourcing R&D can bring maturity to your business, as you will have more time to concentrate on core matters.
3. Cost optimization
Outsourced software R&D services can significantly reduce your costs, including operational expenses, taxes, and salaries. Imagine this: a Middle JavaScript developer’s salary in Eastern Europe constitutes about $45,000 per year compared to 110,000 in the USA. That difference alone can work wonders for your budget! Not to mention, generous tax incentives in regions like Poland, Romania, and Ukraine. If hiring developers on B2B terms, in Poland, IT businesses pay only 8,5-12%; in Romania – 1-10%; and in Ukraine – 5% of income tax. But to make the most of these benefits, you need to choose the right engagement model.
5 Top R&D Outsourcing Success Stories
R&D outsourcing is a powerful tool for driving business improvement. Countless IT companies have already harnessed the potential of this business strategy and seen remarkable results. Let’s have a look at some of the most eminent success stories of R&D outsourcing to Eastern Europe.
Google, the renowned U.S. tech giant, is an outstanding example of how software R&D outsourcing to Eastern Europe can yield remarkable benefits. Google’s strategic expansion began in Poland, with the establishment of their branch in Warsaw back in 2005. This seed of innovation flourished into the Google Cloud Technology Centre in 2021, now their largest R&D facility in Europe. The center currently employs over 500 developers. Google’s influence further extended to Krakow, where their branch houses 100 skilled engineers, working on Google TV, infrastructure and analysis. In 2019, Google recognized the immense potential of M&A deals as a pathway to business growth. This led to the acquisition of CloudSimple with its R&D office in Kyiv, effectively marking Google’s presence in Ukraine as well.
Through these R&D ventures, Google unlocked access to a vast pool of highly qualified programmers and advanced technologies, all the while achieving substantial reductions in their business expenses.
Samsung Electronics
The prominent tech giant from South Korea, Samsung, stands as another compelling testament to the remarkable advantages of outsourced software R&D services. Recognizing the high potential of Eastern European software engineers, the company decided to establish two R&D centers. Samsung R&D Institute Poland (SRPOL) opened its first branch in Warsaw back in 2000. Later, it expanded to Poznan, Lodz, and Krakow, becoming one of the largest and fastest growing R&D centers in the CEE. In 2009, Samsung established another tech R&D center, this time in Ukraine. It has become an advanced technology center with over a thousand IT engineers, working on AI, data intelligence, information security, and visual technologies (AR/VR).
With its prominent R&D centers in the CEE region, Samsung has not only harnessed the boundless potential of local talent but also opened doors to even greater possibilities.
People.ai
Among successful outsourcing R&D cases is also People.ai. This is a Ukrainian-American startup that harnesses the power of machine learning technologies to create a cutting-edge B2B sales acceleration platform. Their example showcases how strategic R&D outsourcing can propel a company to unicorn status, boasting a mind-blowing total value of $1.1 billion and $100 million in investments.
Considering their past negative experiences with various IT outsourcing providers, People.ai made a wise decision to cooperate with the experienced BPO recruitment agency Alcor. The benefits of our partnership were immediate. Within just a month, People.ai got their own R&D center in Eastern Europe with all the necessary back-office support, including office lease, accounting, and legal compliance. Moreover, our recruitment team managed to hire developers in Ukraine and other EE countries in the amount of over 25 seasoned experts. With their dedicated software R&D team in place, People.ai skyrocketed the development of their AI algorithms. As a result, their platform earned a reputation as one of the best in the market.
ThredUP
The world’s largest consignment store ThredUP was looking for ways to speed up its growth. Eager to tap into the vast pool of talented IT specialists and promising business opportunities, the company set its sights on establishing a software R&D center in Eastern Europe.
To ensure smooth software research and development outsourcing, ThredUP reached out to our BPO and recruitment firm Alcor. We covered all the back-office operations, ensuring the best business navigation for our client in EE. In addition, ThredUP got exceptional talents in their software research and development team. Our IT recruiters filled the positions of ML specialist, Java and .Net Warehouse developers. They even managed to hire a Senior Full Stack Engineer with rare C++, C#, .Net, and TCP/IP skills in just 2 weeks! With the dedicated offshore team, ThredUP expanded their business, raising a staggering $168 million in funding from their IPO.
Sift
One more business among the notable R&D outsourcing examples is Sift. It’s a leading USA-based IT product company that develops online fraud detection and management solutions powered by AI and ML. Their vision for rapid business expansion included the ambitious goal of expanding their team with over 35 Eastern European developers. To turn this dream into a reality, they found a valuable partner in Alcor.
To attract top-notch talents, our team orchestrated an employer branding campaign, effectively introducing Sift to the new market. The assigned IT recruiters then crafted an enticing EVP and meticulously designed candidate profiles. These strategic moves resulted in 30 perfectly fitting hires which we managed in under a year! To put their swiftness into perspective, they closed positions for 2 Infrastructure Engineers and a Ruby on Rails Developer in a week.
Beyond IT recruitment, Alcor also provided offshore development services to create a robust R&D office for Sift. Alcor took charge of back-office operations, ensuring seamless legal compliance, payroll, and procurement management. Sift’s continued expansion in the market is driving them to new heights of success.
7 Tips on How to Make Outsourcing Software R&D Work
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Identify if R&D outsourcing is appropriate for your business
Software R&D outsourcing is an ideal solution for product companies who work on large, ever-evolving projects. By enlisting the expertise of an offshore team of skilled IT professionals, these companies can supercharge the development of their products, achieving greater speed and efficiency in the process. This business approach proves equally advantageous for startup companies if they have sufficient investments (Series C funding round and higher).
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Find a suitable destination for your future R&D center
A thorough analysis of the IT ecosystem in various countries is essential when opting for R&D outsourcing services. The destination you pick will directly impact your company’s performance. So, it’s crucial to pay special attention to factors, such as the availability of tech talents, their expertise, salary and taxes, and the location itself.
Take Eastern Europe, for instance, a thriving region that boasts over 1 million tech talents, with largest pools being in Poland (607,000), Ukraine (309,000), and Romania (192,000). These countries also stand out for having affordable developer rates. By choosing to establish their offshore offices here, foreign IT companies can potentially save up to 70% on expenses. Beyond cost-effectiveness, Eastern Europe offers advantages in terms of location. The region’s proximity to Western Europe facilitates instant communication, while the 8–10-hour difference with the USA ensures round-the-cock business functioning.
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Devise a plan & set your budget
As you set your sights on establishing an offshore center in a certain region/country, it’s vital to come up with an outsourcing R&D growth plan and a carefully crafted budget. It’s essential to determine the software developers to hire, their expertise levels and skill stacks, as well as the team size and structure. You should also outline the specific functions you wish to entrust to your offshore team of programmers. After that you can move on to crafting your budget. It should include developers’ annual salaries, office rent, IT recruiting provider fees, and additional spending on employer brand development.
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Choose a trustworthy BPO company
Investing extra time in choosing a reliable service provider is of utmost importance, as the success of your R&D outsourcing depends on their performance. When seeking a good offshore vendor, make sure they possess substantial experience in the IT field, an accomplished team of tech recruiters, and transparent pricing.
One key aspect to consider is the provider’s track record, backed by compelling case studies that illustrate their high level of performance and successful partnerships. Additionally, check if your vendor has outlined guarantees. A reputable offshore partner may provide recruitment liabilities, committing to hire a specific number of developers within well-defined time frames. If they fail to meet the objectives, the vendor should cover the incurred losses.
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All-in-one services are important
Outsourcing software R&D services to a foreign market introduces a bunch of pertinent back-office operations that demand coverage. Allocating them to multiple providers can lead to confusion, unnecessary expenses, and uncoordinated communication between you as the client and vendors. The key lies in cooperating with a provider capable of delivering all-inclusive BPO services for your R&D office, including legal compliance, IT recruitment, payroll, and procurement. This approach will help you receive a seamless solution that won’t contradict any other business processes in your company.
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Don’t forget about employer branding
Make potential candidates fall in love with your IT company! When entering a new labor market, prioritize building a proper employer brand first. Failing to do so can hinder the recruitment process, as tech specialists may remain unaware of your brand’s existence. On the other hand, a compelling employer brand serves as a powerful magnet, attracting skilled programmers. So, talk more about your company on different platforms, mentioning why it’s the perfect place for talented developers. Let them glimpse into your company culture, values, and the exciting opportunities that await them. In this way, you’ll ignite the curiosity of the best talents and speed up the hiring process.
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Establish a connection with your offshore team
As an employer, opting for IT outsourcing under an R&D solution grants you 100% control over your dedicated team, providing ample room for effective team management. One of the most striking benefits is witnessing the commitment your software developers will have towards your product. In return, reciprocate their loyalty by fostering a positive and enjoyable working environment. In addition, it’s always a good idea to organize regular calls, weekly meetings, and team-building activities to maintain a tight connection with your offshore software engineers. This proactive approach not only enhances your remote team’s motivation and productivity but also keeps you well-informed about ongoing development processes.
Risks and Limitations of R&D Outsourcing
Low-quality recruiting
The success of your product greatly depends on the development team, making the IT recruitment process a critical aspect that should never be overlooked. The choice of a reputable staffing supplier can make all the difference, as a misstep here could prove costly. This is because most agencies are interested in hiring specialists as quickly as possible without a thorough hard and soft skills assessment. This in turn can lead to a poor hire. To avoid such an outcome, it’s important to partner with an experienced IT recruitment provider who is attentive to your needs and requirements, thus can find perfect fits for your development team.
Insufficient level of English
One more risk that you may face during R&D outsourcing is low command of English, as it serves as the primary language for communication between developers and the head office. Due to remote collaboration, teammates should deliver their ideas clearly and effectively. Thus, at least Intermediate level of English proficiency is a must. However, finding offshore programmers with the required language skills can be challenging at times. If hiring Eastern European developers, though, you won’t have to deal so much with this problem, since they tend to have a high command of the English language. Poland, Romania, Hungary, Bulgaria, and Czechia are all in the top 25 countries of the EF English Proficiency Index.
R&D Outsourcing Hidden Costs and How to Mitigate Them
One more risk that IT companies may experience while R&D outsourcing are hidden costs. Outsourcing is not always solely about cost reduction and benefits. In certain cases, selecting the wrong partner for your offshoring business can lead to unexpected costs and mismatched services that don’t align with your actual needs.
This often arises when cooperating with outsourcing and outstaffing companies that tend to employ the “cost+” pricing model. In this case, ambiguous services sneakily inflate your expenses, involving additional IT experts, unnecessary software licenses and technical equipment, extra training, and more. Data breaching is another lurking threat. Protecting your intellectual property (IP) is crucial, as malicious service providers may use your sensitive data for their own gain. Inadequate IP protection can result in costly legal battles and compromise a company’s competitive advantage.
Solution. To avoid hidden costs and additional expenses when choosing to outsource software R&D to Ukraine, Poland, Romania, Bulgaria, and other EE locations, conduct a thorough examination of potential partners. It’s better to choose vendors who focus solely on covering back-office services without interfering in your product development. The most ideal case is when they follow a pay-as-you-go approach. This means you only pay for the services you use, without any hidden costs.
Establish Your Own Software R&D Center with Alcor
If you want to have a transparent and hassle-free R&D journey, Alcor is at your service! We’re an international IT recruitment and BPO company that has been building offshore development centers for foreign tech companies for over a decade. We provide our all-in-one services in Poland, Romania, Bulgaria, and Ukraine. Recently, we have also started providing our services in Latin America. Our offer encompasses full-cycle IT recruitment, payroll & accounting, legal compliance, real estate, and procurement management services. Working closely with our clients, we assign a dedicated account manager for prompt dealing with all arising issues related to R&D outsourcing. This personalized approach ensures that you always receive unwavering support throughout the process.
We are also committed to hiring real gems in your offshore development team. Alcor’s 44 IT recruiters make great use of our dynamically growing 600,000-candidate network and utilize the most effective staffing practices. You can count on our high-quality and speedy recruitment. On average, we need 3-6 weeks to close one specific position, while 98% of our candidates successfully pass the probation period. Alcor also provides a 3-month warranty to substitute our candidate free of charge in case they don’t meet your expectations.
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It includes the salary ranges and availability of the requested developers in Poland, Romania, and other countries in EE (as well as time-to-hire metrics and other KPIs for your case).