PACE applies a 2-stage model for client onshore/offshore transitions (figure 1); the first year of the contract is conducted onshore working closely with the client on-site after which the project transitions swiftly to an off-shore operation. The value proposition to clients is threefold and simple: project cycle time, management overhead and employee cost reductions will occur because the Indian team has access to more people, at lower cost, and working across European and American time zones. An added benefit is that project work continues around the clock if necessary.
(figure 1. PACE lifecycle for onshore/offshore transitions)
In its first 18 months of operation PACE has secured 2 European mid-sized software product development firms as clients. A further three prospective clients are nearing contract signing and they have a qualified pipeline of 12 new potential clients. Both of the active contracts are for an initial three-year duration with an option to extend. The first client contracted 60 person-years (over three years) and the second 45 (over three years). The first client company develops products that enable customers to create distributed cross-platform information systems. The second client company's products service secure point-of-sale (POS) transactions and payment validation. Both clients state that the partnership with PACE will allow them to scale; they need more engineers to grow their own business, to handle the needs of existing customers, and to create new products addressing new market opportunities. PACE's engineers are intended to service the companies' legacy products, basically they take on support, maintenance, and patch production.PACE's business plan specifies an IRR (internal rate of return) of between 30% and 50% for its investors, a simple payback period for the original investment of just 2 years, plus annual growth potential of up to 50%. The up-front (sunk) setup cost was 100k. The firm's fixed costs included 2 full-time sales and marketing roles (both based in Europe), in addition there are 3 employees based in India tasked with sourcing and vetting candidate CVs, arranging interviews with client companies (online and via conference calls), visa processing, and other home-base activities aimed at supporting the eventual offshore transitions for projects moving to India. These on-going fixed costs (including accommodation, service charges, travel etc.) amount to around 160k per annum.
Both current clients are nearing the end of the first contract year with teams of 20 and 15 PACE engineers respectively working in onshore mode; however both companies are now expressing a desire to delay (if not a reluctance to proceed to) the next stage - transitioning to offshore operations! To complicate the situation the Indian engineers were hired with a clear expectation of returning to India; relocation to Europe is seen as a temporary assignment. Ambiguity surrounding return dates is becoming a source of dissatisfaction. Many had signed on because they wanted, eventually, to work near home, family and friends. European Winters are cold and wet, the cost of living is high and food, lifestyle, and cultural difference are a source of personal and family stress.
Delays in transitioning clients to full offshore outsourcing mode could have a major impact on PACE's business model. Simply put, the company's expected net revenue (surplus) for each contracted engineer is 5k per year while the engineer is working onshore at the client site, whereas it is 25k per engineer per year after the project transitions to full offshore mode. In onshore mode the company is barely able to meet its operating costs let alone accumulate surpluses for profit sharing (a promised employee incentive) or provide a return to investors. The company needs to transition clients to full offshore mode if it is going to do more than survive.
