Business Services, Thought Leaders

How to Choose a Business Model to Organize Your International Operations

July 14, 2020

by Dmitry Ovcharenko

CEO, ALCOR

If you decide to expand or build your business abroad, you will face a common question: what business model is best for me? In this article, I analyze and present the most popular models as well as identify the strengths and weaknesses of each.

There are many reasons why you may want to consider expanding your business abroad. One of the most important ones is the need to find skilled workers, as well as the desire to save money. 

Yet in all cases, in order to successfully grow your own business, you need to choose the most suitable business model and that model will depend on your goals. 

Working for numerous tech companies in various positions, I have seen many problems that businesses face. From my own experience and expertise, I will analyze the 4 different models as well as their advantages and disadvantages.

In most cases, you will deal with one of four business models. These are their classic names for convenience.

The 4 Types of Business Models:

Captive operations model 
Joint venture model    
Fee-for-service model
Build-operate-transfer model

Captive Operations Model 

This business model includes opening an office abroad, staffing it, and taking care of all operational activities. Other references to this model include software development center, development hub, R&D center, or development office.

Among the strengths of this business model, there are:

  • Strong Control — The company runs all business processes as well as supervises the activities of their employees directly.
  • Convenience —The new office will use the same communication tools and systems, and you will know how to handle them.
  • Knowledge-Sharing — It’s easy for a company to transfer employees between the main office and the captive center to share experiences.
  • Corporate Culture — Your company’s values will apply to the new branch so you stay on the same page.
  • Quality and Data Confidentiality — Your company will keep ownership and control over IP rights, level of service, and data security.

However, the captive operations business model also has its drawbacks, those include:

  • High Costs — Launching an office and hiring employees in a new country is time- and money-consuming.
  • Knowledge Gap — The company may lack the understanding of local issues because they did not work here before.
  • Recruiting — Hiring local talent might take longer since the company does not know the specifics of the local job market.

The captive operations model features strong control and high investments. At the same time, it has low set-up speed and flexibility. It will be useful for business owners who wish to prevent many risks. 

Joint Venture Model    

A joint venture is the combined effort of two companies to start a facility and deliver service during a specific period. The involved businesses usually have different but complementary expertise. 

With this model, the two sides share ownership over the facility. At the same time, one of the involved parties sacrifices control over the processes for the other one to face the risks.  

The benefits of a joint venture are as follows:

  • Risk and Resources Sharing — The shared commitments and lower investments of each company can allow for getting solid results.
  • Time Limit — A joint venture is a temporary agreement, so there is almost no chance or need for long-term commitments.

While the advantages are quite attractive, the drawbacks are also there. In particular:

  • Lack of Equality — The two sides usually contribute different levels of expertise and investment. 
  • Productivity — The varying cultural norms and management styles may lead to lower effectiveness and quality of the final product. 

A joint venture has comparatively low control and resource commitment, yet it is not very flexible. Therefore, you must thoroughly think over all the benefits and drawbacks.

Fee-for-Service Model

The fee-for-service model allows you to decrease the degree of supervision and handle more important issues. In this case, a client signs a contract with a vendor that has facilities and staff in a foreign location.

The contract may be either fixed-priced or tied to the time a vendor would spend to deliver the services (time & materials). 

This model also has a few sub-models with different names like “Fixed Price”, “T&M”, “Team Extension”, etc. that mix the concepts of both pricing and engagement models. The names are so commonly used that these terms have become commonplace and rarely require explanation.

This business model offers the following benefits:

  • No Routine — Delegating standard procedures with clear business rules is a great idea, especially when they are not interdependent with other business functions.
  • Responsibility —The vendor must perform according to the standards identified by the client in the service-level agreement.
  • Flexibility —The fee-for-service scheme offers the lowest risk and highest flexibility, including easy volume increase.
  • Preview — This model of business operations can turn into a stepping stone toward the more committed partnership (if it works out well).

Overall, the business model seems to be a good choice. Yet you should also know about the negative aspects of such cooperation:

  • Lack of Commitment — The vendor is interested in receiving the payment, which may result in lower motivation to deliver a qualitative service.
  • Opportunism — The vendors may often take advantage of the client by imposing hidden fees and unexpected costs.

With this model, a business receives the opportunity to delegate tasks to the employees of another company. Thus, the company has low control and makes low investments but enjoys high flexibility and a fast start.

Build-Operate-Transfer Model

The BOT model involves a service provider in a foreign country who builds, owns, operates, and staffs the office on behalf of the client.

The customer later buys out the already-functioning office at an agreed price. This model comprises 3 stages:

B (for “build”). A vendor takes care of administrative and legal issues, facility management, and necessary equipment.
O (for “operate”). The vendor manages all operational services (HR, training, accounting, payroll, benefits, security, etc.).
T (for “transfer”). The client buys out the entire functioning operation after a fixed period. 

With this model, the client pays a fee during the build and operate stages then gets the running office after the transfer. The model benefits businesses by:

  • Speed — The specialized vendor that takes care of everything can set up a new office faster than the company.
  • Simplicity — In most cases, it is easier for a local service provider to handle all legal issues when setting up an office.
  • Expertise — The vendor has the experience and unique knowledge in recruiting, real estate, and legal compliance to speed up the process.

No matter how beneficial such a business model might seem, there are always some disadvantages you should know about:

  • Vendor — Finding an appropriate vendor is difficult since they are reluctant to invest their own money into setting up the facility.
  • Experience — The client gets no or little experience in running the facility, which may later turn into an operational or management problem. 

The BOT model offers a high level of control after the transfer, yet quite low flexibility. However, you can choose BOT 2.0, an updated version of the BOT model.

BOT 2.0 works best for IT product companies that want to go offshore because they do not have the transfer stage — which is one of the main challenges in such a model.

BOT compared to BOT 2.0
  
Take the time to compare the two versions and analyze which one would be better for you.

What Business Model Should You Use? 

The choice of a business model depends on a range of factors including security, cultural differences, and control level requirements. Don’t forget to acknowledge the political and economic state of the country where you would like to expand. 

If it is an emerging country with a completely different culture, unclear market, and political situation, companies prefer using the fee-for-service model. This is because most of the risks are allocated to a supplier. 

However, if we are talking, for example, Ukraine or other Eastern European countries with Western values of doing business, it is fair to prefer the captive or BOT models. 

It’s also worth mentioning that your offshore success is determined by a trusted service provider. Keep in mind that the win-win solution can be reached with service companies that do not provide outsourcing development. 

At the same time, outsourcing development should be an active player in the IT market that particularly works with operational management in tech.

In my opinion, BOT 2.0 is the best choice because it shares your risks and backs up all legal, payroll, financial, real estate, HR, and other processes. That is what makes this model revolutionary.  

If the IT product is not your main business and you need an accurate solution, then the fee-for-service model will be optimal for you. It’ll allow you to receive expertise and a ready-made solution.

Picking a specific model does not mean that your company must stick to it, yet an initial correct choice is worth millions.

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