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Managed Engineering Teams: The Low-cost, Low-risk model

Updated: May 8

Are you planning to hire outsourced engineers in India to complete your next project or product? If your answer is yes, you’re not alone. Many startups and businesses hire Indian engineers for their product development, back-end services, and design work. India is still the destination of choice for accessing top-notch digital and engineering talent.

"Post Covid-19, we expect a third wave of outsourcing and an increasing number of technology roles globally finding their way to India as work from anywhere becomes the new accepted norm" - Goldman Sachs

Global companies have two traditional options to access the growing talent pool in India. At a minimum, they can outsource their services to an offshore service provider. On the other hand, they can set up their own captive unit, or "Global Capability Center." Both of these options have their pros and cons.


Option 1: Offshore Service Providers


PROS


Low Risk: No subsidiary or risk exposure for the client. Completely owned and operated by the service provider.


CONS


Low Control: Low control and low visibility of resource allocation, rotation, experience levels and delivery processes.


High Costs: High talent rates compared to salary costs in captives. High or prohibitive BOT Transfer costs, in the case of a BOT option.


Option II: Captives (Global Capability Centers)


PROS


Total Control: Dedicated center and team with good business integration and Knowledge/sensitive IP protection.


Low Costs: 15 - 25% savings over offshore service providers based on the infrastructure & support costs on actuals, which can be plowed back to attract and retain better talent.


CONS


High Risk: Long set-up process and risk exposure due to statutory compliance requirements and potential risk of center un-sustainability due to inadequate leadership or strategy choices.


Organizations with a low appetite for risk prefer to work with Offshore service providers, but with an option for transforming the engagement into a captive with a BOT model.


According to NASSCOM, India employs over 1 million people in it's captive segment, making it one of the attractive market segments for service providers for the BOT model. We are also seeing a growing trend of RFPs for captive units or CoEs from global organizations to support this.


While this sounds like a great idea, it is actually a very difficult option for offshore service providers. Letting go of your talent and revenue streams is difficult for them, so they compensate with a higher talent rate during the operate phase and/or a higher Transfer price for the talent transfer during the Transfer phase of the BOT engagement.


Needless to say, this is an area of optimization and a new generation of players are stepping in to address this opportunity with a hybrid model of engagement, incorporating the best of both options.


Called the Managed Engineering teams, where the cost of talent & infrastructure are transparent and on actuals. In addition to Zero Transfer Fee for the Transfer phase.


Managed Engineering Teams (Best of both worlds)


PROS


Total Control: Dedicated Center & team with IP protection and an integrated distributed agile delivery model to support the extended team model.


Low Cost: Transparent salary and support costs on actuals with a flat PMO fee for governance with a "Zero-fee" transfer at the end of the BOT tenure.


Low Risk: Quick and easy set-up. No statutory compliance risk. Hassle-free exit or zero-fee transfer of resources to own entity (when ready).


Organizations that have existing offshore contracts and want to create their own legal entity in India can use the hybrid model as a stepping stone or test bed before diving fully into setting up their own legal entity.


Managed Engineering Team (MET) is a low-risk, high yield business model. It allows companies to explore captive operations without the full-fledged legal commitment of an actual captive center. It's a great way to explore the benefits of a captive center while keeping all the risk at a low level.


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