European companies are finding financial benefits to outsourcing and are doing it more and more. The primary difference between American and European outsourcing is nearness. When an American company does offshore outsourcing, very little consideration is ever given to nearness of the vendor company. Technological developments have made this statistic negligible.

One of the biggest areas of European “nearshore” outsourcing is the IT function. These can be classified into three types of outsourcing: project based, dedicated center and captive operations.

The most common is project-based outsourcing. This is where the vendor company is hired to run or assist in completing a specific, usually long-term project. When the project and all follow-up work are complete, the relationship between the hiring company and nearshore outsourcing destination company is over.

The “captive operations” type of outsourcing is where the company sets up its own office in the nearshore location, usually an Eastern European country. There they hire native workers, but still management from their own country. This is possibly the most risky strategy in terms of investment capital required, operational efficiency and organizational issues. This path is sometimes appropriate for large and multinational companies prepared to take these risks and familiar and ready for the personnel and staffing issues.

A growing strategy is that of “dedicated development centers” (DDCs) which is less costly than the captive operations strategy, but works well in a long-term relationship approach. DDC involves having full-time developers working exclusively on client projects for a prolonged period of time. Although technically these people work for the vendor company, it is like having a virtual extension of the client office in the nearshore country.

DDCs can be further categorized. A dedicated team model, for example, is very common. In this model the vendor provides the facilities and allocates the team, but the client has full operational control.

The term “tailored DDC” is used to describe a facility tailored to the custom business model, with specific technology needs and perhaps special organizational structure. These can be product development centers, research and development centers, software maintenance and support centers, application reengineering centers, quality assurance centers, etc.

A joint venture DDC is often a transitional stage working towards a captive operations style of outsourcing. Both vendor and customer support it. They share the risks and responsibilities.

The “build-operate-transfer” option is similar to the joint venture DDC. In this case it is designed, specifically, to be turned into a captive operation. The vendor sets up the business infrastructure, hires personnel and establishes and runs the center for a predetermined length of time. Afterwards this facility is turned over completely to the client.

Many European companies wanting to outsource all or some of their IT functions are turning to one of these methods of DDC outsourcing.