Build-Operate-Transfer in IT Outsourcing Explained
When it comes to IT, outsourcing is nothing new. Companies have been using it for years, for many reasons, but mainly because of a shortage of adequate local talent and the widely recognized possibility to save time and money that way. Statistics suggest that IT outsourcing will become even more prevalent in the near future. With an expected annual growth rate of 8.20%, revenue in this market segment is projected to reach US$587.60bn by 2027.
On the other hand, companies increasingly recognize that this kind of delivery model comes with its own set of challenges. Fortunately, the Build-Operate-Transfer model is a compelling attempt at addressing some of the fundamental issues businesses face when it comes to outsourcing.
What is a Build-Operate-Transfer model?
Build-Operate-Transfer (BOT) is a project delivery method that derives from a model used in public-private partnerships, usually in large infrastructure investments. In the IT context, however, both client and vendor are usually private companies. A vendor company hires (Build stage) and manages (Operate stage) a team for the client company with the intention of handing it over to the client after an agreed time (Transfer stage).
One of the immediately recognizable benefits of partnering up with a local business is their knowledge of the local market, regulations, customs, and business practices. It is extremely advantageous when creating an IT hub, a software development center, or any other form of subsidiary company.
The vendor’s local expertise (and, in some cases, better brand recognition) makes BOT a reliable way of building dedicated IT teams in remote locations. The pains of recruiting the right talent, finding adequate office space, and complying with the local regulations are all taken care of by a vendor company, which continues to operate the team until the client takeover.
BOT can be an excellent alternative to building or expanding an in-house team as well as to traditional outsourcing. The model allows companies to save costs and time while retaining the ownership of a product and maintaining the company culture across the board.
BOT method Vs. traditional IT outsourcing
Traditionally, most IT outsourcing partnerships followed the Fee-for-Service Model (FFS). In this model, clients delegate tasks or projects to another company that performs them according to a service-level agreement. In other words, a vendor company provides a service for a client company by assigning its employees to work on given tasks or projects.
While on the surface Build-Operate-Transfer model may seem similar to the traditional Fee-for-Service outsourcing model, there are differences you should be aware of. The FFS model offers a great deal of flexibility from the vendor but, in many cases, results in lower levels of staff commitment. Consult the table below for a side-by-side comparison.
Phases of the BOT model explained
The BOT model is named after the three phases it comprises: Build, Operate, and Transfer. Let’s take a close look at what happens in each stage and who is responsible for what.
Phase 1: Build
This stage begins with deciding on the scope and conditions of the collaboration. Depending on the client's needs, the timeframe for the Build phase can vary, but in the case of Maxima, it shouldn’t take more than a month. The initial hiring is easy with our long bench of prospective employees, and our team is highly proficient in performing required legal activities.
So what exactly happens during the Build phase?
- Establishing the rules of partnership. For the partnership to be successful, you need to establish a clear separation of concerns. The BOT method should be considered a framework that can and should be adapted to the client's company-specific needs.
- Recruitment. For most IT consultancy companies that offer BOT solutions, including Maxima, recruitment is a big part of the business. That means better access to the local talent pool, and, in some cases, better brand recognition in the region. The vendor’s knowledge of local employment laws and relocation regulations can drastically improve the speed of recruitment processes.
- Office setup. This step includes finding the right location and equipping it with suitable infrastructure, including Internet access, servers, workstations, and other devices, software, and security rules. This work is also done by a vendor.
- Legal operations. The vendor is also responsible for all necessary legal actions in the target country, including establishing the subsidiary company if the client company wishes so.
- Training and knowledge sharing. Vendor and client companies work together to ensure that employees have access to the information they need to start working. They learn about your company culture, processes, procedures, technical requirements of the project, as well as the business goals.
Phase 2: Operate
After both the office and the team are ready, the team begins to work. During this time, they report to your local partner, who’s also responsible for all HR issues and additional recruitment needs.
Typically, during the Operate phase, you can expect:
- Additional hiring. because the team that started was the minimal one to start the job, but if you decide to change the scope or someone resigns, more hiring is possible - all on the vendor side
- Continued education. Employees know that they work for you and that they will formally transition to your company at a later date, so they're motivated to get to know your company culture and find ways to better fit their team in your organizational structure.
- Optimization. The work of the team is constantly optimized to better suit your needs. The team works in ways that are modeled on your company processes and follow your procedures to make sure the transition will be as easy as it gets, but they are experts with their own observations and ideas on how to work smarter and in a more effective way.
- Results. Before handing out the company from a vendor to a parent company, at least a minimum viable product should be developed. It is possible to prolong the period of local ownership, but shortening it isn’t recommended since it would mean taking more risk than you bargained for.
- Important decisions. In this stage of the partnership, the client company should focus on communicating its needs and support the optimization of workflows and processes. In an exemplary scenario, the client is also responsible for final recruitment decisions. Depending on the agreement and the pace of work, the client company may also decide to shorten or expand the Operate phase duration.
Phase 3: Transfer
At this stage, the client company takes over the office and employees. Although the initial timeframe should mention when this phase should happen, it is usually possible for the client to accelerate or delay it. This last stage of a BOT model is generally pretty straightforward. Both parties simply perform actions necessary to transfer as described in the initial agreement.
This is what exactly happens during the Transfer stage of BOT:
- The transfer of the employees' contracts or the company ownership. A competent service agreement and months of preparations on the vendor side usually make the transition quite easy. In some cases, the employees sign new contracts with the client company. In other cases, if a vendor company has created a subsidiary company for this partnership, the ownership of the whole company is transferred to the client.
- Decision on the scope of future collaboration. The transfer phase is not always synonymous with the end of the business relationship. Most BOT providers offer additional solutions, including legal advice, HR, and recruitment services. If cooperation was successful to this point, it might be highly beneficial to secure your vendor’s continuous support, but in a redefined scope.
Maxima Consulting Build-Operate-Transfer Case Study
Maxima Consulting has supported businesses in their IT needs, including enterprise software development, infrastructure & operations, and information risk management, since 1993. We successfully completed a number of Build-Operate-Transfer contacts, including a Security Administration project for one of our clients, a global financial institution from the United States. You can read the whole success story here.
Pros & cons of the Build-Operate-Transfer model in IT
Although Build-Operate-Transfer merits outweigh its flaws for most companies, it’s important to understand what challenges may arise and be prepared to tackle them. The table below provides a quick overview of both advantages and disadvantages of the Build-Operate-Transfer method.
7 benefits of Build-Operate-Transfer in IT services
- Access to a global talent pool. Partnership with a vendor specialized in recruitment means access to a massive talent pool in your desired location. Furthermore, if your business isn’t known in your desired location yet, your partner’s brand may be more recognizable than yours, resulting in more candidates. Best consulting companies have a presence in multiple countries and are very proficient with their local immigration laws, making relocation of crucial workers as easy as it gets.
- When it comes to IT skills available on the market, the location really does matter. It's especially true for legacy skills, which are still very important for financial institutions and governmental agencies (among others). From our experience, candidates with impressive skill sets are easier to find offshore. Partially because of their smaller expectations, partially because they understand niche skills are still essential for many foreign clients, who happen to pay better than local companies.
- Short time to value. Your partner’s local know-how allows you to establish a functional facility quickly and begin the work typically within a month after signing the contract. Depending on the target location, candidates may expect smaller compensation, resulting in the possibility of a bigger team on the same budget. Additionally, employees with prospects of being hired by you directly in the future often are motivated to show their value to your company from day one.
- Risk reduction. Clear separation of responsibilities between client and vendor companies leads to them sharing a risk. In other words, by taking care of your business objective in the target country, the vendor takes away a part of the risk your company would normally take. Typically, all risks related to setting up the company in a different country, compliance with local law, hiring, HR, and payroll are delegated to the vendor.
- Combine savings with ownership. One of the most important incentives to consider any form of outsourcing is, of course, saving money. Build-Operate-Transfer is almost as cost-effective as any other form of outsourcing, but it comes with a bonus - the team is built to work specifically for you from the very beginning. Employees work in accordance with your processes, and the results of their work belong to you.
- Access to local operational know-how. Knowledge of local regulations, customs, hiring practices, candidate expectations, and possible pitfalls allows your local partner to act quickly and without hesitation. An experienced vendor will kick off the work in no time and make sure all day-to-day operations are running smoothly.
- Scalability and flexibility. The Build-Operate-Transfer model gives the partnership a structure, but vendors often offer BOT variants or allow for its modification to better suit the client company's needs. Usually, it’s also pretty easy to scale your local team up or down, as well as extend or shorten the Operate phase.
- Local team embraces the company culture. Although the employees may have contracts with your vendor, not your company, they know from day one you are their future employer. The vendor-supplied local HR department will support your company in introducing your future team to your company’s culture, processes, and rules.
3 common challenges with the BOT model
- A reliable partner is a must. It may be as plain as day, but it can’t be stressed enough. The same as with all other forms of outsourcing, choosing the right local partner is simply crucial for the success of your project. You need a trustworthy partner who can prove their expertise and experience.
- Not for every project. The Build-Operate-Transfer model is versatile enough to be used in many IT-related scenarios, from creating a software development team to a cybersecurity unit, but it's not a one-fits-all solution. Before making a decision, it's best to look at the alternatives and examine your priorities. Consider the size and complexity of the project, your budget, and business goals, and think about how to address data security and intellectual property issues.
- Communication is essential. When it comes to remote cooperation, probably nothing is more important than clear and regular communication. Prepare to dedicate a substantial amount of time to oversight and guidance, especially at the beginning of the process. Before choosing a target location for your new team, consider possible communication difficulties derived from living in different time zones, as well as from cultural or language differences. Ask your soon-to-be partner about their approach to communication, diversity, and inclusion.
Typical Build-Operate-Transfer timeline
Month 1: Build
Typically, the first step - establishing a team - takes up to a month. In this first month, the essential employees are hired, required hardware and software bought and the office space secured. This is where the massive time savings happen - with knowledge of the local market and regulations, access to the talent pool, and local brand recognizability, your partner can build your new team in record times.
Months 2-11+: Operate
Operate phase takes anywhere between 10 to 24 months (in some cases more). It depends on the size and complexity of the product and is usually predefined, but possible to reschedule. This phase can typically be prolonged if the parent company would like to do it (for any reason). In some cases, it could be also shortened. However, it is recommended to take over only after the team is fully-operational and a substantial amount of work is already done.
Month 12+: Transfer
The transfer shouldn’t take more time than a month, as it’s prepared in advance. This stage ends a BOT timeline, but many businesses decide to continue a limited partnership with the vendor company. For example, your BOT partner probably offers HR and recruitment solutions that your company already benefitted from. This later partnership can go on indefinitely, but it’s no longer a part of the Build-Operate-Transfer model.
There’s more than one way to enjoy the benefits of the BOT outsourcing model. Variants of this approach exist to accommodate the specific needs of various businesses. BOT 2.0. is the most recognizable one in IT. Your local partner supports you in establishing a subsidiary company in your target area, recruitment, and management. The difference is that you own the company from day one, resulting in your local partner's limited involvement, including the possibility of giving them no access to your data and intellectual property at all.
Important factors to consider before deciding on the BOT model
Now that you know what Build-Operate-Transfer is, how it typically works, and what are the advantages and disadvantages of choosing this model of IT outsourcing, you probably have a good idea if it’s something your company would benefit from or not. Nevertheless, making this decision can be somewhat easier with a list of consideration points below.
- What is the scope of the project? How big and complex is it? What is your expected time-to-market? How fast do you need the results?
- What skills and competencies do you need to make your project happen? What part of those do you already have internally? What are skills your existing teams lack?
- How much risk can your organization handle in relation to this project? Is sharing the risk with your vendor a strong argument for your project’s approval?
- How important is it for the vendor to be close to your company, both geographically and culturally? Typically, offshoring is more cost-effective, but the employees there work different hours and have different work habits, while nearshoring is more expensive but offers a closer culture fit and similar working hours.
- Consider data security and compliance with regulations regarding data in all locations. What are the laws regarding data protection in the desired country of operation?
- How well-defined is the project? Do you expect a lot of changes or corrections in the future? How flexible should the vendor be to comply with your expectations?
- How much should it cost? Estimate how much your company would pay for setting up the project in-house and use the number as a point of reference when negotiating a deal with your chosen vendor.
- How important is it for the employees involved with this project to feel like a part of your company? How important is it for them to understand and comply with your company culture, organizational approach, and communication style?
How does the BOT business model preserve your control?
There is a number of ways to address the issue of control and oversight in projects based on the Build-Operate-Transfer method. Experienced vendors will find a proper way to comply with your internal data and intellectual property concerns. For example, when using the BOT 2.0 variant, your local partner will create a subsidiary company in your company’s name during the Build phase.
Make your digital strategy actionable with BOT
Partnership based on the Build-Operate-Transfer model is a great way to bypass the global IT talent shortage we’re experiencing in 2022. With a reliable, experienced partner, a BOT method can be a way of achieving your IT goals quickly while retaining ownership and control over projects.
Maxima Consulting has supported businesses in their IT needs since 1993. With offices on three continents, a long bench of talented IT consultants, and numerous successful partnerships, we’ll be more than happy to work on a Build-Operate-Transfer project with you. You can easily contact us by sending a message or scheduling an online meeting.