Our company is investigating a couple of outsourcing companies and operating models and one that we're starting to lean towards is the Build-Operate-Transfer (BOT) model with a firm that has some specific domain expertise we're looking for.
The model is that:
- the outsourcing firm will establish a separate subsidiary for us focused on developing an aspect of our product
- they will seed this company with engineers with domain expertise from their existing company
- they will grow the company by recruiting new engineers and we will be involved in that recruiting process
- they will operate the company for 12-24 months and bill at a fixed rate per engineer
- we will then buy out the company from them at the end of the period at some predetermined fixed rate and take over operation of the company
The advantages for us are lower upfront costs as we build up our operations.
So I'm looking for general feedback from others on their experiences with this sort of model, what to look out for and what are some best practices.
Also I'm interested in any feedback on the financial aspects.
- Should we expect (or push for) a reduced operating rate in the initial period since the expectation is that will be recouped when the operation is transfered?
- What are typical models for the transfer price at the end of the operate period? Is it a simple multiple of engineering salaries?
Jason and Shree, thank you for your answers. I'm replying to them here due to the comment length limitation
Ultimately our goal is to have an offshore subsidiary as part of the global development team. However in the early stages of the company we don't want the expense and hassle of establishing that subsidiary. We do however want to leverage the cost advantages of an offshore team for a portion of our product. We do only have one product but it's fairly large and we'll keep some of the key development in house but want to outsource other elements.
The concern I have had with traditional outsourcing relationships is that the team members may move around in the company or leave the company, one of the advantages of the BOT model is that we're building a team that will be become employees. So we invest in building a team and eventually take over the operation of that team with this BOT model.
We are also looking at other options including a straight outsourcing model, starting the offshore company now (and looking at headhunting fees) etc but when this BOT model came up I saw that it had some attractive attributes but I didn't have any direct experience with it, hence the question to this community.
I have found that there are multiple firms that offer this model, so it doesn't appear to be that rare. Here's a reference: Build Operate Transfer: Tensilica’s Experience in Offshoring Engineering to India and an update (pdf).