Why and When Should You Have Your Own Nearshore Software Company?

Natural development of a startup

Along its lifecycle, every startup will go through several phases we all know: MVP product, pivot, release 2, pivot, release 3 and so on... until it either fails or develops an effective business model.

The process of discovering the company’s role in the market is a turbulent time for every startup team.

The image above shows how much software may change following its launch on the market. Every interaction with the client will verify their actual needs and likely result in changes in the functionalities of the application.

Startups in their initial stages usually consist of two or a maximum of three people, where one is responsible for technological issues (CTO) and the others for marketing and sales.

A startup may seek additional support in the form of a UX/UI expert or a complementary team of 1-2 programmers. Such a team can easily support changes and development in the first phase of a startup's life-cycle.

However, the moment a tech startup starts making money, the changes and software stability issues become very important and two, three or even four developers may no longer be enough. Then, the company most likely goes about recruiting additional developers to work along the growing outsourcing team. Since startups reluctantly delegate their whole IT to external companies, they may decide to retain several in-house developers controlling external developers. This approach, in my opinion, works best for both parties.

But what is the risk, how long can that situation be sustained and where is it ultimately going to take the business?

Risk for the investor and your business

The development from the idea to the MVP version of the startup is initially financed by its founders or with the help of small grants from seed accelerators or business angels.

At the time, when the business model is verified and becomes profitable, scalability is needed to generate big profit. Building scale is only possible through marketing and sales – efforts which cost money. Along with the development of the startup's sales and marketing, there will be an increasing number of changes in the software, and their complexity will be greater. Maintenance will also become more demanding in the process.

Therefore, a strategic investor is needed at this point to invest money and allow the company to scale up. The investor never sees the sales team as an issue simply because it is relatively easy to build. Development team, however, is a whole different story.

This is what an investor thinks: if the business has generated minimal sales and the service or product has stood the test of the market, the risk is relatively small. But if the startup's foundations, i.e. the code and the IT department are being outsourced, the risk is enormous. A collapse of the software house providing such services to a startup will spell its imminent disaster. The lack of in-house IT may be a deal-breaker for many investors.

The conclusion is simple. Without doubt, outsourcing is good and can take the company to another level. At some point in its development, however, a startup should keep the code and the IT department in-house.

The best approach

Stop outsourcing and take on some in-house developers – that's the only logical solution. But only apparently. Countries that take advantage of international technology startups – including England, Germany, USA, United Arab Emirates – are in serious demand for developers themselves. The recruitment processes in these countries, instead of traditional job posting, involve headhunting and other tricky measures like bribing developers away from one employer to make them work for another. The workers are also getting paid insane remuneration, completely disproportional to the profits generated by the startup. As a result, assembling a larger team is nothing short of miraculous and always involves "long waiting times.”

For contrast, countries like Poland or Spain are not “users” of startups. Instead, they successfully produce them for foreign markets. In this particular case, I will focus on Poland, where my software house is based, to demonstrate an approach that in my experience proves the most efficient.

From the MVP phase where just two people are outsourced from the software house, the startup proceeds to the second phase, and the team usually grows to 10 -12 developers. The third phase involves setting up the startup’s own, independent office in Poland.

The picture below illustrates the process:

 

How difficult is setting up an IT branch in Poland and what are the benefits?

Setting up such an IT office is simple and the risk is really small provided that there is an experienced partner responsible for its organization. With this need in mind, the nearshore software house should offer three levels of service:

  • Developing a startup until the MVP stage
  • Maintenance and development services
  • Support and organization of the Polish branch for the client

The benefits of running an office in Poland:

A significant reduction in costs. Generating profit in dollars, euros or pounds while incurring costs in Polish zloty yields 400%-500% savings compared to developing in your country.

Quality of service. The quality of work of developers and UX designers matches international level. 85% of IT businesses in Poland provide services for companies based in London, Berlin, the USA and Dubai.

Security. Poland is a member of the European Union, which makes business regulations clear and international tax settlement easy.

Flying to Poland from Germany or England takes just 1 to 2 hours. This allows getting on the plane in the morning and being back home before the end of the day.

The office is entirely yours and at your command, including the software and developers.

What should the partner building your branch provide?

  • HR Procedures
  • Technical and management knowledge
  • Legal, administrative and accounting knowledge
  • Ongoing support in training and maintenance of the company
  • CEO hiring process in case such a person is not provided by you

How to set up a branch in Poland - Step by Step

Step 1 - Cost data

The software house should detail the costs and provide relevant information on:

  • Hourly rates and salaries of individual specialists depending on their experience
  • Salaries of administration staff (secretary, assistant)
  • Applicable taxes and methods of their settlement
  • The cost of employee benefits (sports cards, private medical care, training etc.)
  • Information on staff turnover and assumptions concerning the number of new employees recruited in a month
  • The total effective number of working hours per person per year
  • Office space costs
  • Cost of HR services
  • Cost of legal services
  • Cost of accounting department
  • The cost of traveling from your location to Poland
  • Software house’s organization fees

Step 2 - Partner test

Request the partner to build a team of up to 4-5 people and a product owner. Assign first, small task to them. While the task is in progress, add two additional people to the team.

The test should continue for 3 to 6 months.

Review:

  • developers’ competence
  • product owner’s competence
  • communication and response times
  • knowledge of applicable working methodologies
  • professional tools used by the company
  • speed of building new teams
  • application and code quality
  • HR methods used. Does the company stand out?

Step 3 - Setting up the company and transferring developers

How it works:

The Polish software house employs a team which is provided with initial training and onboarding to work on your startup (the new developers work on your project exclusively from the start).

Then, every 3 to 6 months the team is transferred to your new company at a previously agreed fee.

Depending on the agreement, this process may continue for 24 months or until a the company gets sufficient staff.

Step 4 - Agreement and the establishment of the company

If the tests run successfully and communication is fine, the next step is finding or using one of the Polish law firms proposed by the software house to handle duties connected with setting up of the new company. Limited liability company or a joint stock company proves to be the best legal form for such a company.

The agreement must stipulate the details of the recruitment process and staff transfer.

Such document should also describe the roles and responsibilities of the Polish software house before, during and after termination of the cooperation agreement.

You can safeguard yourself against circumstances like the situation when the delegated developers quit after a month of work. The software house should compensate for such loss without additional fees. The guaranteed period should cover 3-months of work.

The difference between using the services of an HR company and the method described in this article is that, in addition to qualified staff, you are getting the whole company structure and relevant knowledge to run an office in Poland. In this way, you also gain a valuable partnership with a company that will always support you in you efforts, which is key to the success of such a venture.

Also take a look at our Slideshare presentation on this subject - "Why Should You Build a Nearshore Office in Poland and How To Do It?".

Contact me at krzysztof.marszalek@rst-it.com if you find the idea interesting.