This article discusses the 4 different business models used by outsourcing companies. Each of these has distinct advantages and risks. Which one is right for your next project? Read on and find out!

This is the second article in a 2 part series. You can find [1] Part 1. The ‘3 Flavours of Freelancers’ here. It discusses the features and risks associated with the different types of freelancer.

Part 2. The 4 Flavours of Outsource Service Providers

This article discusses outsource companies, as opposed to individual freelancers. Hiring a company to do your work can offer some significant advantages over a freelancer, but it does come at a cost.

Outsource Service Providers- General Information

Before we dive into their respective models, here are some of the general pros and cons of using a service provider/company instead of a freelancer.

Pros

• May apply more rigorous development and project management systems to the work, lowering the risk of failure
• May be able to offer a range of professionals. Diversity of skills allows for multiple tasks to be carried out simultaneously
• Scalability, can often add more people or remove people at short notice
• May appoint project managers or project leads to manage the team for you. This gives you a single point of contact and a single point of accountability if something goes wrong
• Can ‘crank out’ large quantities of work in very short period of time. The easiest way to get bigger projects done FAST!
• In-house infrastructure such as hosting/development environments can reduce your costs in the short term

Cons

• Less visibility of work (you’re likely to have groups of people doing your work, without knowing who they are or their skill sets)
• A greater tendency to ‘black box’ work. That is, hide the work from you until it is ‘finished’ in their opinion, and then ambush you to signoff on the project on the due date
• Can have trouble with communicating requirements because of ‘Chinese whispers’. Often there is a single representative appointed to act as a go between, screening you from direct interaction with the people doing the work
• Some companies are skilled at extracting more money for less work. Particularly if they control development environments, you could find yourself held to ransom by an unscrupulous provider
• May get lower skilled labour assigned to your project, resulting in lower quality output (the classic bait and switch)
• Larger companies may be less committed to your success if they have a high volume of work. One bad review can be buried very quickly, and may be less expensive than fixing the project. Sucks if it’s your project they decide to cut their losses on
• Jack of all trades mentality. ‘We’re experts at everything’ attitude can result in generally poorer quality product, and many companies are reluctant to admit which areas they are stronger or weaker in

Where do they come from?

Online, Outsource Service Providers come from just about everywhere. Like freelancers, they tend to be predominately from developing nations; however unlike freelancers, a large proportion of providers have created ‘local’ presences particularly in the US and UK. There are also a lot of locally based companies that do the opposite to compete in this space. In addition to their local business operations, they create a business unit offshore and send work there to be completed at lower cost, whilst charging you a premium rate.

Below, we’ll discuss the 4 distinct models that I’ve come across are:

• Type 1: Standard Full Service Providers
• Type 2: Specialised Service Providers
• Type 3: White Label ‘Full Service’ Middlemen
• Type 4: White Label ‘Hands Off’ Middlemen

Type 1: Standard Full Service Providers

These are just your standard one-stop-shops. These are the most common outsource providers online, and typically brand themselves as ‘website builders’, ‘online marketing’, or ‘virtual personal assistants’ etc. They hire multi-disciplinary teams, break your project into bits and allocate the tasks. You’ll usually have a team lead that you deal with exclusively, and will have very limited access to the people doing your work. If it’s a larger project ($20K+) you’ll often get to deal directly with the company owner, in addition to the team leader.

The structure I’ve seen applied regularly is:

• Sales and bidding is done by the most proficient English speaker/writer, usually with a background in the subject matter
• Once the work is won, a project/team lead is appointed to work with you. They are usually are highly qualified. You discuss requirements with them, they pass this onto your ‘team’. They are responsible for managing your ‘team’.
• You have limited interaction with your ‘team’, they are often fairly junior people such as freshly minted graduates. I’ve noticed that particularly in software firms, people in these teams often have weak English and technical skills compared to the ‘front men’ in the business
• You pay a compound hourly rate or predetermined fixed cost based on your project. You do not hire individuals and you don’t get to choose them
• They are pretty much the same as local service providers, except that they’re based somewhere not local and they’re a a lot cheaper

Pros

• Scalability. These organisations can be big- it is not unusual to see companies (claiming) to have 50+ staff. They can add and remove people from your project as required to meet your deadline.
• Ease of use. If you’re new to outsourcing, or new to the field you’re outsourcing (like web development) these firms offer an easy way to launch and manage a project. You just have to know what you want…
• Most of the project management can be taken care of for you, leaving you to focus on your business
• Single point of contact can be convenient
• You don’t have to worry about finding multiple professionals to do the various bits you need done. You can just dump it all with the same company
• Redundancy of skills. If someone is off, away sick etc. then they can often be quickly replaced. If the company uses adequate documentation and work management systems, they can pick up where the last person left off so you project is not interrupted.

Cons

• More expensive than freelancers. With additional infrastructure costs, and the need to pay wages as well as maintain a profit margin, these guys are nearly always more expensive than an equivalent freelancer
• Lack of visibility of your team and of the work being done. You could be paying a compound rate of $20/hr, for skills that you could buy for $10/hr. Also, because you can’t see who’s doing what, it may be very late in the project before discovering that quality has become are really big issue. The only thing worse than 10 hours of wasted effort is 50
• Lack of accountability. The more people involved, the richer the ground for blame shifting. Can be very frustrating especially when coupled with delayed communications because of time zones.
• You have limited control. When quality issues arise, all you can do is request that the problem be fixed. However, if there is a systematic weakness (such as one or more of your team being too unskilled) you are somewhat powerless to properly identify and resolve it. Instead you have to deal with a constant barrage of corrections which can ultimately cause the project to fail.

What are they good for?

Full service outsource providers are far better for larger projects than freelancers, and can offer you a scalable workforce; just remember that they still need to be closely managed to succeed at complex work.

They’re also a great way to get started if you haven’t outsourced before. If you’re sure where to start and need support and advice with managing a (simple) project, they offer a very good solution.

To a lesser extent, they’re also useful for business people who have a clear understanding of what they want, but don’t have time to micromanage the project. If the work they’re doing is integral to the business however (like a website for an ecommerce business) you should NOT adopt a ‘hands off’ approach!

General recommendation for Full Service Outsource Providers:

Great if you have a big job, clear requirements, and a solid project plan. In some ways, they’re the ‘lazy mans’ solution to outsourcing. You pay for the convenience, but depending on your situation, they can provide a great outcome.

Type 2: Specialised Service Providers

These companies build up a team of skilled professionals in a particular field, and actually say ‘no’ to work outside of their expertise. Examples might include graphic designers, database design and administration, or specialists in a particular software language like C++. They are in the minority, as most providers tend to diversify.

Pros

• Tend to be very good at their particular field, and have extensive experience
• Often get better ‘bang for your buck’. Output quality is usually higher, and work gets done more quickly than with ‘full service’ providers
• Makes it easier to understand what you are buying. Eg you’re getting X quantifiable skill
• Can offer significant ‘value add’ in their field of expertise

Cons

• Can be a nuisance to hire and coordinate multiple teams from multiple companies. For example, on a simple website project you might have hired an ASP.NET specialist, and graphic design firm. That’s 2 sets of proposals, double the bid management, and now you’ve got 2 distinct projects to coordinate. This can quite easily become 3 or 4 if you consider testing, HTML generation, etc.
• Limited scope of experience outside their particular expertise. This may result in them being less able to add value or contribute to other areas of your project
• May quote higher prices than generalist providers, and it can be difficult to tell upfront if there really is a value advantage
• You may be tempted to encourage them to ‘stretch’ and do work that they are not familiar with, resulting in poor quality output
• If you aren’t sure of your requirements, they can be difficult to work with and coordinate in a cost effective way

What are they good for?

Specialist providers are great for when you know what you want. If you can define the skill sets you need, and you require more then 20hrs of them in a given week, there is no better option. You will get a better result, generally at a lower cost, then if you were to use a full service provider.

However, it can be difficult to differentiate specialists because that’s what everyone claims to be. Also once you do find a company that is really great at something, you will be tempted to have them do more of your work. ‘They’re great at X, so they’ll be great at Y’ has ended in tears for me a couple of times. Keep the work isolated to what they’re proven to be good at; as with freelancers, only hire for a single discipline.

General recommendation for Specialist Service Providers:

Great if you have a big single discipline job, clear requirements, and a solid project plan. For smaller jobs, I would usually look for freelancer’s that offer the same thing. They usually cost less and are easier to work with (no Chinese whispers).

Type 3: White Label ‘Full Service’ Middlemen

Not sure what white label means? Click here for [3] my article or here for [4] wikipedia

These companies will bid on your project as a local service provider. If they win, they’ll sub-contract the work to freelancers, less their cut. They usually operate under a company brand, and are often locally based. They’ll emphasis that they’re a trustworthy ‘US’ company for example, and promote their local credentials. They’ll often have a core team that manage the outsourced work, but don’t do to much of it themselves.

This is an increasingly common model being used by local service providers in the US, UK, Australia, and Canada. Outsourcing work offers them the same dramatic cost savings and scalability available to you. But, you get the assurance of using a local business… it just so happens that the work is done somewhere else. Does it matter that they don’t do it themselves?

The ethics of charging you a local price is a separate debate

Next time you get a logo produced at your local graphics studio, it’s reasonable to wonder if that logo was drawn here… Or was it drawn 10 000 miles away… and whether you just paid $350 for something that cost $65…

There’s also an opportunity here for those with the entrepreneurial spirit. Have ever wanted to be a graphic designer? Maybe a web developer? Well now you can … and you don’t need training or experience. Brilliant model or Internet madness? You decide!

Pros

• Local assurance. The work will be covered by whatever consumer protection is in place in your country
• You have an office you can go into and stamp your feet if something goes wrong (for all that’s worth :))
• Local professionals can ‘value add’ by providing relevant advice help you achieve your business objectives, not just complete the project. This is something foreign providers cannot offer.
• May apply a high degree of rigour to the project management process
• They manage the freelancers, releasing you to focus on your business
• Usually very high quality because the projects are well run, hard to discern from local work

Cons

• You’re paying a high premium to a local to manage work you could manage yourself
• You could believe that you are paying a premium to have a local do the work when this is not the case
• If the freelancer fails, the company may ‘blame the hired help’, make excuses and generally waste your time as they try and work out a solution. Doesn’t help you when you just need it done!
• They are often experimenting in the online outsourcing space, as most of their business comes from the ‘real world’. This means they may not be as committed to a successful outcome as a business whose primary objective is to maximise their profits online.
• You can achieve very similar results at a much lower cost by just using a full service outsource provider from a developing nation

What are they good for?

These guys are hard to avoid if you want to pay ‘local’ rates online. There is very little difference in terms of outward appearance. That’s what makes it an attractive option for local providers.

For me personally, I don’t want to pay local rates online. I buy online, with all it’s risks and quirks, to save money. If I have work that I want a local to do, I’ll walk into a shopfront.

General recommendation for White Label ‘Full Service’ Middlemen:

Avoid if detected. Don’t pay local rates online.

Type 4: White Label ‘Hands Off’ Middlemen

These guys are the final type of outsourcer I’ve identified, and a disclaimer I have not used this model of provider yet.

Here’s how they work. In essence, they’re a weird hybrid, a cross between a recruitment agency and a consulting company. They supply the infrastructure (building, PC internet etc.) which you lease from them. They also provide you with potential employees. You interview these as you would any new recruit, and hire the most suitable. They then go to work for you in the space you’ve just leased from the outsourcer. They manage the staff member’s attendance and pay, based on your requirements. But, they take no role in performance. It’s up to you to set targets, and ensure that your work gets done! Odd eh?

Here’s my pros and cons… just speculation at this point though!

Pros

• You can interview candidates and control quality of your skills pool
• You can sack and swap out staff quickly if someone isn’t performing
• Control of infrastructure ensures that you have a common, consistent environment (physical and technology wise) for your employees
• Ensures standardised work attendance, hours, tools and inputs
• May simplify payments and budgeting
• You get many of the benefits of having employees, without the local legislative protections

Cons

• More expensive than other forms of web based outsourcing because you have to directly pay for infrastructure and hiring costs. These are normally absorbed and aggregated
• You don’t get quality assurance or additional project management support. They’re your staff, your problem!
• Less of a buffer between you and your people for cultural communication issues. Appointed team leaders are often more experienced in managing the cultural nuances than you are
• The labour is less ‘outcome driven’. The outsource provider doesn’t care whether your work is finished on time. That is outside their responsibility
• All of the pitfalls of having employees

What are they good for?

I’m not sure. I suspect they would be beneficial for Business Process Outsourcing, as distinct from the outsourcing of projects. If you have a small business, and you want to establish a permanent labour force overseas, this could be a cost effective way to build that team.

General recommendation for White Label ‘Full Service’ Middlemen:

I dunno. If you have experience with this kind of provider, please let me know and I’ll update this article with your comments.

That wraps up our extended discussion about the types of outsourcer that currently exist online. As you can see, there is a wide variety of models and they each have strengths and weaknesses. I hope this article contributes to your success! If you have any comments, criticisms or feedback please feel welcome to contact me.

If you’re looking for part one of this article, you can find it here. [1] Part 1. The ‘3 Flavours of Freelancers’ here.