Establishing a legal entity in a lower-cost region sounds like a golden opportunity. Just imagine, you open a remote office in Ukraine or India and get top talent at a more affordable cost. But hold on. Beneath the surface lies a complex web of local labor laws, tax regulations, and compliance hurdles that can quickly turn this “golden” opportunity into a costly misstep.
Even industry leaders like Apple aren’t immune to these complexities. After years of benefiting from favorable tax rates in Ireland, Apple found itself in the EU’s crosshairs, facing an order to pay around €13 billion in back taxes. The message is clear: no company, no matter how large, can afford to overlook compliance.
So, if even Apple can stumble, what can smaller companies do to avoid similar pitfalls? If you’re not ready to give up the idea of setting up a legal entity abroad, you’ve got two options: 1) become an expert in local regulations or 2) hire pricey consultants to navigate them for you.
But compliance isn’t your only hurdle. Building and retaining a reliable team in a foreign market presents its own set of challenges.
You can either build an in-house HR department, which takes time and money, or outsource to a recruitment agency. However, recruitment agencies typically shy away from the ongoing responsibilities of payroll, retention, and HR management—meaning you’re often left with the legwork.
That’s why many businesses choose a simpler route – an offshore development center (ODC). Why struggle with the headaches of setting up an office abroad on your own when you can tap into the same pool of skilled engineers without the local bureaucracy attached? It’s like getting all the perks of a local office minus the admin nightmares.
So, what is an ODC and how do you set up a dedicated offshore development center? Let’s dive in.
What is an offshore development center?
Before we discuss the top destinations for establishing an offshore software development center, let’s briefly remind you how it operates. Simply put, an offshore development center is an overseas office with a cross-functional dedicated team. There are different models of running such an office and here are the most common ones.
Build-Operate-Transfer (BOT) model
Say you want to set up your own offshore development center but don’t want the hassle of doing everything from scratch. You team up with a service provider who sets up the offshore software development center according to your requirements – recruits the team, prepares the infrastructure, and ensures all necessary processes and tools are in place.
The provider runs the ODC for an agreed period, taking care of day-to-day stuff like project management, quality assurance, and admin tasks. After this phase, full ownership of the offshore development center, including all assets, resources, and knowledge, goes to you. It’s a smart choice for companies that don’t want to deal with the initial setup hassle but move straight into managing offshore development teams.
Dedicated offshore development center
If you’re ready to dive in from day one, a dedicated offshore development center is the model you’re looking for. Here’s how it works: a local service provider steps in to help set everything up, ensuring that all the equipment like hardware, software, and network systems are provided. Your partner also handles legal requirements related to employment, data protection, and other regulatory matters. Administrative tasks like payroll, benefits, and human resources are also on them.
As for the client side, you get full ownership of the offshore development center and manage your team directly. It means you have total control over how things go and how projects are delivered, but you still get some solid support for your administrative needs. It’s a great option for long-term projects that need constant oversight.
Co-managed offshore software development center
In the co-managed offshore development center model, both you and the offshore service provider share the responsibilities. For example, you might be directly involved in strategic decision-making while the provider manages day-to-day operations. You actively participate in the recruitment process and vet candidates, while the service provider handles payroll, legal compliance, and taxes, namely things they are experts in.
With both of you in the loop, communication flows much better. It’s much easier to keep everyone in sync when you’re both making decisions.
If you’re unsure which offshore development center model suits your needs best, here’s a quick rundown to highlight their core differences.
Nearshore vs offshore software development center: Which destination should you choose?
Now we are coming to the most interesting part – what location to pick for a dedicated offshore development center. To help you make the right decision, let’s look at the market and compare the most popular destinations using criteria like cost of living, availability of experts, political and economic stability, English proficiency, and more.
We will analyze LATAM, Eastern Europe, and Asia, to see what each location has to offer.
Latin America (LATAM)
Reasonable salaries and skilled developers make Latin America, or LATAM for short, a go-to destination for outsourcing. Top choices include Mexico, Brazil, Argentina, and more. Let’s explore additional factors to see if it could be an ideal location to set up an offshore development center.
Cost of living
According to a recent study by Statista, the minimum cost of living in Mexico is $786, while it’s $675 in Brazil. Consequently, the cost of offshore development services will be lower here compared to the USA, for example, where the monthly cost of living averages around $2,500 to $3,500 per month.
Availability of tech experts
Latin America is a hotspot for tech talent, with over 1 million software developers in the region. Let’s take Brazil as an example. In 2023, they had almost 500,000 developers. Mexico adds another 220,000, and Argentina steps in with about 115,000. And that’s not even counting the rest of the LATAM destinations.
IT graduates and higher education
The talent pool in Latin America is only getting bigger, with Brazil and Mexico alone churning out 600,000 tech graduates every year. On top of that, the uniRank database lists 1,867 officially recognized higher-education institutions in LATAM, including big names like Tecnológico de Monterrey (Mexico) and Pontificia Universidad Católica de Chile that pave the way in engineering for new-coming IT specialists. So, the future of tech here is looking bright for LATAM.
Number of IT companies
Let’s look at the hottest destinations to build offshore development centers in Latin America. Naturally, Brazil is a major player with more than 9,000 companies operating in the software development and production sector. Argentina is no slouch either, with around 5,900 registered tech companies in the market. As of September 2024, the country has become home to more than 700 startups.
Political and economic stability
Latin America is a diverse region with varying levels of political and economic stability. Consider Mexico in this case. It has made significant strides in political stability over the years, although it still faces challenges related to corruption and organized crime. At the same time, Mexico’s economy is one of the largest in LATAM, with a significant industrial base. The country benefits from numerous trade agreements, like the United States-Mexico-Canada Agreement (USMCA). It aims to update and modernize trade relations between the three countries, reflecting technological changes, labor practices, and other economic factors.
Talking about the negative sides of things if you’re about to set up an offshore development center in LATAM, Argentina experiences frequent political shifts and economic crises, which can affect its attractiveness for outsourcing. At the same time, Brazil, the largest economy in the region, also faces challenges such as high inflation and economic policy uncertainty.
Time zone difference
Most countries in the Latin American region share similar time zones with the United States, making it convenient for collaboration and business operations. Even when there is a two or three-hour difference, it doesn’t hinder communication or workflow. The small time gap means offshore development teams can still work together smoothly, scheduling meetings and calls at convenient time slots for everyone.
English proficiency
The level of English varies across Latin American countries. According to the English Proficiency Index by Statista, Argentina has 560 out of a maximum of 800 points, which is the highest in the region. Peru and Chile are somewhere in between, with 521 and 518 points respectively. Mexico is near the bottom of the list.
When looking at the EF English Proficiency Index 2023, which ranks countries based on English skills, we see a similar pattern. Argentina is ranked as a country with high, Peru and Chile – moderate, and Mexico – with low proficiency.
Cultural compatibility
Latin America and the U.S. share several cultural similarities that make them compatible, especially in business. Both regions prioritize strong personal relationships and trust in professional dealings, so finding an offshore development center that would be good for doing business with will be relatively easy.
These cultures value hard work and dedication. Latin Americans are known for their strong work ethic, which aligns well with American business practices. The U.S. is a melting pot of cultures, and Latin America is also highly diverse. Such a cultural mix helps everyone appreciate different perspectives and get along better.
Quality of infrastructure
Countries like Mexico implemented national strategies to foster digital transformation. For example, the Internet for All initiative increased internet access in rural areas from 10.8 million in 2018 to 17.5 million people in 2024.
Colombia, in turn, launched a National Digital Strategy (NDS) for 2023-2026 which focuses on connectivity, data infrastructure, digital trust and security, and more. It aims to speed up digital transformation, boost economic growth through technology, and position the country as a digital leader in the region.
Key takeaways
Latin America stands out as an attractive destination for opening an offshore development center. The growing talent pool, cultural compatibility, and small time zone differences with the US are contributing factors that make LATAM a number one spot for American businesses. But don’t overlook such factors as English proficiency and economic stability. We recommend conducting thorough risk assessments before choosing the location for your remote development center.
Eastern Europe
Eastern Europe is an attractive option for setting up an ODC offshore development center. Skilled tech talent, great cost savings, and solid infrastructure – that’s what makes the region a winning choice for many tech companies.
While you can explore various countries in Eastern Europe for offshore development center services, we’ll mainly focus on Poland and Ukraine, as they are currently among the top outsourcing destinations.
Now, let’s look at the key factors to consider when searching for a software development company in Eastern Europe.
Cost of living
According to Numbeo, living in Poland costs about 2,946 PLN (around $734) a month, not including rent. On Glassdoor, the average salary for a software developer in Poland is about 12,000 PLN or $3,000 per month. While these numbers can vary by city, it still makes Poland a more appealing destination for offshore development centers compared to Western Europe and the USA.
Availability of tech experts
As of 2023, Poland counted the highest number of software developers in Central and Eastern Europe – 401,000. Ukraine takes the second place with around 200,000 tech specialists.
Quoting another source, IT Research Ukraine 2023, there are nearly 307,000 tech specialists in Ukraine, with 65,000 of them based abroad. Because of the war in Ukraine, many Ukrainian IT specialists relocated to other countries for safety. Despite the upheaval, they continue working for local and foreign companies, demonstrating remarkable resilience and dedication.
IT graduates and higher education
In 2023, more than 30,000 students in Ukraine got their degrees in IT fields, while around 35,000 people were enrolled in IT universities the same year. The top Ukrainian higher education institutions by the number of entrants to IT specialties are the National Technical University of Ukraine “Ihor Sikorsky Kyiv Polytechnic Institute”, Lviv Polytechnic National University, and more. Talking of Poland, during the 2022/23 academic year, about 70,000 students were studying ICT subjects in the country.
Number of IT companies
According to IT Research Ukraine 2023, more than 2,000 tech enterprises are officially registered in Ukraine. At the same time, ukraine.ua states that the country hosts around 4,000 tech companies, including numerous startups and even unicorns. In 2019, GitLab became the first Ukrainian unicorn, followed by Grammarly as the second. In the Global Startup Ecosystem Index 2024, Ukraine is ranked 46th out of 100 countries.
Political and economic stability
Despite facing one of the most challenging times in its history, Ukraine is standing strong and fighting on. Its economy remains resilient. Even with the ongoing war, businesses, including offshore software development centers, continue to operate, and the tech sector, in particular, is showing remarkable strength and adaptability.
Talking of Poland, it experienced consistent economic growth over the past few decades, often outpacing other European nations. Its GDP growth rate has remained robust, even during global economic downturns and the pandemic.
Time zone difference
Many Eastern European countries are just a couple of hours ahead of their Western counterparts. It means that dedicated offshore software developers can easily coordinate meetings and collaborate in real-time.
The situation is a bit different when you have teams in the U.S. and Eastern Europe. While the folks in the USA are finishing up for the day, the teams in Eastern Europe are just getting started. At first glance, it might seem like a downside, but because of this overlap projects can keep rolling, creating a 24/7 work cycle.
English proficiency
According to EF English Proficiency Index 2023, Poland is ranked 13 out of 113 countries. Ukraine, in turn, has 45th place. But when it comes to Ukraine, this ranking doesn’t give you a full picture. Since the full-scale invasion by russia, more people started learning English, especially those in the IT field. Tech companies, in turn, push language learning by educating their staff. In 2024, the President of Ukraine signed a law that makes English one of the languages of international communication in Ukraine.
Cultural compatibility
Eastern Europe has a lot in common with Western European countries and the USA, especially when it comes to things like professionalism, a solid work ethic, and a commitment to education. It leads to smoother communication and collaboration in tech and business sectors.
Professionals in Eastern Europe are well-versed in Western business practices and cultures. So, when partnering with an offshore software development team in the region, you may be confident you’ll get clear communication, transparency, and a collaborative spirit.
Quality of infrastructure
Eastern Europe boasts a high-quality tech infrastructure that has been rapidly developing over the past few years. For example, according to the International Telecommunication Union, countries like Estonia and Latvia have some of the highest internet penetration rates in Europe, with Estonia boasting a rate of over 90%.
Many Eastern European governments launched initiatives to promote digital transformation. For example, the Polish government announced plans to invest over €1 billion in its digital infrastructure as part of the National Recovery Plan following the COVID-19 pandemic.
When it comes to Ukraine, the country has always had a solid tech infrastructure and a thriving tech scene, but everything flipped upside down with russia’s invasion. But even though the enemy keeps targeting critical infrastructure, the Ukrainian tech community remains strong. IT companies use backup power and Starlink Internet to get work done under any conditions. They’ve managed to adjust and keep the wheels turning despite everything going on.
Key takeaways
Eastern Europe offers a compelling blend of affordability, skilled talent, and robust infrastructure for opening offshore development centers. For stability and ease of collaboration, Poland comes as a strong choice, while Ukraine remains a more promising option for businesses seeking innovative and cost-effective solutions with an adaptable workforce. Of course, the geopolitical situation in Ukraine comes as a downside, but you can always choose regions in Western Ukraine, where many IT professionals have successfully relocated.
Asia
If you’re looking to outsource software development services, you can’t ignore Asian countries like India, Pakistan, and others. They offer everything from IT and customer support to finance and accounting, healthcare, and legal services. According to research forecasts, the revenue from business process outsourcing in Asia is expected to hit $109 billion by 2029.
Now, let’s take a closer look at this region and evaluate it from the perspective of setting up offshore development centers.
Cost of living
We will start with India, as a global leader in the outsourcing industry. The cost of living there is 29,038 INR (around $344) and it’s 17.6% lower than in Ukraine. It makes India a budget-friendly ODC destination as the cost of outsourced software development services will be also cheaper.
In countries like Thailand and Bangladesh, the cost of living is higher than in India, so you should keep this in mind when picking an offshore software development company in the region.
Availability of tech experts
As of 2023, the number of Indian developers on GitHub is next to 13 million and it might surpass the USA in total developer number by 2027. In neighboring Pakistan, the tech landscape is also thriving, with over 300,000 English-speaking IT professionals and more than 20,000 new IT graduates entering the workforce each year.
IT graduates and higher education
When it comes to higher education, India has one of the highest numbers of STEM graduates, with 34% of all grads coming from these fields. The country has nearly 9,000 engineering colleges both private and government-run. As for Pakistan, more than one million students currently study in the STEM field.
Number of IT companies
India is home to a vibrant startup ecosystem, particularly in cities like Bangalore, Hyderabad, and Pune. As of April 2024, over 127,000 startups were officially registered in India.
Political and economic stability
India is one of the fastest-growing major economies, with booming sectors like tech, manufacturing, and services driving this growth. From 2014 to 2024, the economy almost doubled, rising from $2 trillion to nearly $4 trillion. However, issues like unemployment and inflation remain concerns.
On the other hand, Pakistan is a country that experiences political instability with frequent changes in government and corruption. The economy also faces challenges, including high inflation, fiscal deficits, and reliance on international loans.
Time zone difference
If we look at India Standard Time, it’s 10 hours and 30 minutes ahead of New York, which can make communication between offshore teams pretty tricky. But if you’re in Europe, like London, the time difference is just 5 hours and 30 minutes, making it a bit easier to coordinate offshore development centers.
English proficiency
Many developers in India are fluent in English, as it’s widely taught in schools and used in higher education facilities, especially in technical fields. A survey showed that 88% of people in urban areas can speak English, while only 3% in rural areas can. Yet, you’ll often hear on IT forums that some people find it difficult to understand Indian developers because of their accent, which comes from the phonetics of native Indian languages. But honestly, anyone who’s not bilingual can have a bit of a tricky accent, right? It’s a small price you pay for speaking more than one language.
According to the EF English Proficiency Index 2023, both India and Bangladesh have moderate proficiency in English. In contrast, Pakistan ranks 64th with a low proficiency level.
Cultural compatibility
While Asia is one of the world’s top outsourcing hubs with countless companies hiring developers there, its work culture is quite different from that in the USA or Western Europe. In the States, for instance, employees at all levels are encouraged to pitch in ideas and take part in decision-making. But in Asian countries, decision-making often sits with the higher-ups.
When it comes to communication, Americans are known for being direct and clear. On the flip side, in Asia, communication can be more indirect and subtle, in particular, if you’re about to team up with an offshore development center. Employees might avoid giving direct negative feedback as they don’t want to offend or embarrass others, especially superiors. So, if you’re looking for software development as a service in Asia, it’s crucial to be aware of these cultural differences.
Quality of infrastructure
However, India holds the title for the most government-imposed internet blackouts in the world. In 2022, the Internet was shut down about 84 times across the country. Crazy, right?
Key takeaways
Asia remains a powerhouse for outsourcing software development services due to its cost-effectiveness, solid talent pool, and strong STEM education systems. While India is the clear leader with a well-established tech sector, countries like Pakistan and Bangladesh offer viable alternatives for more budget-conscious projects. However, don’t forget about cultural differences, the time zone gap with the US, and potential infrastructure challenges when setting up offshore development centers in the region.
Factors to consider when picking an ODC provider
Of course, you’re not limited to the ODC destinations we’ve mentioned. Whether you decide to set up offshore development centers in Asia, Africa or the Baltic region, it’s important to be careful when choosing a tech partner. Here are the key aspects you should pay attention to.
Resources and pricing model
First off, you need to find out where the offshore development company is getting its specialists from. Are they using people from their bench, or are they hiring from the market? Both options can work, but hiring from the market, like we do at KPS, means you can find someone who perfectly fits your budget and project needs, rather than taking whoever is available.
Next, think about the pricing model the service provider offers and whether it suits your project. Most tech companies use either a Time and Materials (T&M) model, where you pay for the actual hours worked, or a fixed monthly retainer, where you pay a set fee for specified services. Yet, it might be unclear how your funds are allocated in both models.
With KPS, you get full transparency into your project budget. You pay the developer’s salary plus a service fee, which actually gets lower as your team grows. For example, if you need one developer, the service fee is $1800. But if you need five specialists, the fee drops to $1000 each. This way, you know exactly what you’re paying for and can manage your budget more effectively.
Recruitment and staffing process
It’s crucial to understand the recruitment process and the tools an offshore development center provider uses. Find out what methods they use for recruiting specialists, such as job boards, recruitment agencies, and whether they have an in-house team. Ask how quickly they can set up an offshore development team and if they can ramp up the team as your project grows.
Consider the company’s talent retention and attrition rates as well – high retention suggests a stable workforce, while high attrition may signal potential issues. Finally, learn about the company’s strategies for scaling teams, like how they manage larger groups, maintain quality, and ensure efficient communication and collaboration in offshore development centers.
Compliance standards
When you’re checking out an offshore development center provider, it’s important to see how they handle compliance with industry standards like GDPR and ISO. You need companies that prioritize data security and have the right certifications, such as ISO 27001 or SOC 2. Those certifications show that the company has solid processes in place to protect sensitive information and follow legal regulations.
Legal readiness
As mentioned earlier, one of the biggest advantages of setting up offshore development centers is that you don’t have to worry about all the boring admin and paperwork – the provider takes care of that for you. However, it’s on you to make sure the provider can actually handle those tasks effectively.
Check if a chosen company has expertise in handling local labor laws, tax regulations, and data protection laws in the offshore location. What’s more, an offshore development center provider should have a local legal counsel or a dedicated legal team in-house to help with employment contracts, IP agreements, and compliance.
Once you know a company meets these criteria, you can confidently add them to your shortlist of potential tech partners.
Final thoughts
If you’re still unsure whether an ODC is a good idea or trying to decide between in-house software development vs outsourcing, just think about the financial and quality perks of a dedicated offshore development center. Outsourcing can be a great choice, especially if you go with a cost-effective place like Ukraine. With Kultprosvet, you can build a dedicated offshore team tailored specifically to your needs while having full transparency on where your money goes. Contact us to discuss your offshore development center.
Got more questions about offshore development centers?
How do I know if an offshore development center model fits my current project?
To understand if an offshore development center is the right move for your project, consider its scope and duration. ODCs work best for long-term projects or those that need ongoing development. Additionally, evaluate your budget, as offshore development centers often offer significant cost savings compared to in-house development.
An offshore development center meaning: Is it something similar to a dedicated team operating abroad, right?
Exactly! A dedicated offshore development center is a dedicated team established in another country by a provider who handles all the administrative aspects, such as hiring, payroll, and office management.
What are offshore development center benefits?
An offshore development center has a ton of benefits. First off, you can save money because labor costs are usually way lower than hiring locally. Plus, you get access to a global talent pool. And the best part? You still have control over the whole development process, with a clear view of how your resources are used. Oh, and one more thing: offshore development centers can also assign dedicated project managers to help you out.