1. The Hague University, Academy of Masters & Professional Courses
Strategic Matching Between Dutch and Serbian
Companies in Software Development Offshoring
- Master Thesis -
Author: Ivan Milenković
Group: MBAPT08
Module: MBA Business Report
Tutor: Dr A.A. Voogt
Disclaimer: All rights reserved. No part of this document may be reproduced in any form or
by any means without prior written permission of the author.

2. 2
Table of Contents
1 Executive Summary.............................................................................................................3
2 Introduction.........................................................................................................................4
3 Research Design ..................................................................................................................5
3.1 Problem Definition..................................................................................................5
3.2 Sponsor’s Perspective .............................................................................................6
3.3 Research Philosophy and Approach ........................................................................6
3.4 Research Strategy....................................................................................................7
3.5 Research Questions/Objectives ...............................................................................8
4 Theoretical Framework......................................................................................................10
Introduction......................................................................................................................10
4.1 Strategic Look at Software Development Value Chain..........................................10
4.2 Cost Saving Model................................................................................................14
4.3 Enhanced Flexibility Model ..................................................................................17
4.4 Company Expansion Model ..................................................................................21
4.5 Summary of the Theoretical Framework ...............................................................23
4.6 Answers to the Theoretical Research Questions ....................................................24
5 Empirical Framework ........................................................................................................26
Introduction......................................................................................................................26
5.1 Dutch Software Development Market ...................................................................26
5.2 Serbian Location Advantages in IT Industry..........................................................27
5.3 Context and Method of Research...........................................................................29
5.4 Empirical Findings................................................................................................31
Introduction..................................................................................................................31
5.4.1 CASE 1: Enigmatry, Tam-Tam and Vega IT Sourcing ..................................31
5.4.2 CASE 2: Hinttech..........................................................................................39
5.4.3 CASE 3: XXC – SCICOMP ..........................................................................42
5.4.4 CASE 4: Levi 9.............................................................................................47
5.5 Synthesis and Answers to the Empirical Research Questions.................................51
6 Conclusions and Reflections ..............................................................................................55
7 References.........................................................................................................................58

3. 3
1 Executive Summary
This paper presents theoretical and empirical findings of a research, conducted by Ivan
Milenkovic, as a final phase of Master of Business Administration studies on The Hague
University. The researcher has previous experience of 15 years in IT industry, both in the
Netherlands and in Serbia.
The research is sponsored by Serbia Investment and Export Promotion Agency (SIEPA), a
government agency of the Republic of Serbia, dedicated to promoting foreign business in
Serbia and supporting Serbian companies to step out in international market.
The research problem is to explore strategic matching between Dutch client companies and
their Serbian service providers in offshoring software development. By identifying patterns
and designing models of offshoring strategies, the research provides a tool for strategic
matching or a quick test of already established relation between a client and a supplier in an
offshoring arrangement.

4. 4
2 Introduction
This document is organized in 6 chapters.
Chapter (1) is an executive summary, giving basic facts about the research.
This chapter (2) gives a roadmap of the document, with very brief explanations about the
content of each of the chapters.
Chapter (3) discusses the research design. The research problem is defined in (3.1). The
research sponsor and their perspective are introduced in (3.2). The researcher’s standpoint,
philosophy and approach to the research problem are discussed in (3.3), while research
strategy is decided in (3.4). The questions and objectives of the theoretical and empirical
framework of the research are explained in (3.5).
Chapter (4) gives the theoretical framework of the research. A strategic analysis of software
development value chain is given in (4.1). Further, in the following subchapters, three original
offshoring models are presented: Cost Saving (4.2), Enhanced Flexibility (4.3) and Company
Expansion (4.4). As a conclusion of the chapter, a summary is given in (4.5) and explicit
answers to the theoretical framework research questions in (4.6).
Chapter (5) gives the empirical framework of the research. A review of relevant parameters of
Dutch and Serbian IT markets is given in (5.1) and (5.2) respectively. Empirical methods of
the research are presented in (5.3). In subchapter (5.4) are presented four cases: interview
findings and analysis. The chapter is concluded by the Synthesis (5.5) and the explicit
answers to the empirical research questions (5.5).
Chapter (6) contains conclusions with answer to the main research question. At the end the
applicability of the results is discussed and the limitations of the research.

5. 5
3 Research Design
3.1 Problem Definition
An offshoring of IT function – moving a part of company’s IT activities to the low cost lands
– is a hot topic in the Netherlands for decades (Beulen, 2005). With rapid development in
communication technologies and their wide spread usage, offshoring continuously grows and
changes.
The focus of this research will be on offshoring of software development. The term offshoring
points out to the dislocation of the activities abroad. The term outsourcing means letting the
activities be done by an external party, regardless of the location. Thus, offshored
development can be also outsourced, when offshoring partner appears to be another company,
which is the most common case. However, if a company established abroad their own
department, treated in all aspects as an equal to their other departments, then we speak about
the offshoring but not the outsourcing, because the activities done on the offshore location are
still done in-house.
Offshore outsourcing is often called just offshoring, for convenience reasons. In the same
context is sometimes the term outsourcing used with the same meaning. We will also use the
terms offshoring and outsourcing interchangeably, essentially meaning software development
offshore outsourcing whenever it is not explicitly specified otherwise. In a way this is correct,
because whenever we speak about outsourcing problem it is also recognized in the situation
of offshore outsourcing.
Many authors silently overlook software development when they analyze outsourcing and
offshoring of IT activities, focusing their examples on different IT services. The reason for
that is a problematic measurability of the quality of offshored software development, which
was not sufficiently researched till recently (Gopal and Koka, 2009). This volatility makes the
major management problems for offshoring clients: how to compare offshore development
suppliers and how to make a choice between them.
Considering software development value chain, we distinguish the activities that are more and
less appropriate for offshoring. According to Carmel and Tjia (2005), “coding” (i.e. making
the programs) is the best candidate, but those judgments also have to be reconsidered through
the spectacles of offshoring partners’ business strategies.
Practical part of the research considers Dutch software companies as offshoring clients and
Serbian software companies as development service suppliers. Based on a series of interviews
with people practicing offshoring software development from the Netherlands to Serbia, the
research looks closely into the strategies clients apply in domestic market, the corresponding
offshoring strategies and the reflection of it on the relations with the supplier. As one of the
key aspects of supplier’s business model that is directly linked to the success of projects, the
research considers types of suppliers’ human resources strategies and their match with clients’
offshoring strategies.

6. 6
3.2 Sponsor’s Perspective
SIEPA is a government organization of the Republic of Serbia, dedicated to promoting
foreign business in Serbia by helping foreign investors and buyers and supporting Serbian
companies going international.
In FDI supporting, the Agency operates as one-stop-shop foreign investor advisor throughout
the investment project:
- In pre-investment phase with information concerning FDI-related legislation, industry
analysis, operation cost analysis etc.
- In investment set-up phase, SIEPA offers assistance with company founding
(registration, work permits, office space etc.), identifying best locations and facilities
for investment, organizing site visits, partner matching and facilitating contacts with
authorities
- In post-investment phase, SIEPA advices on business service providers (banks,
leasing companies, consulting firms, law offices, real estate agencies etc.), helps by
linking with local suppliers and takes the role of ombudsman in the case of
bureaucracy problems in any level
Also, SIEPA helps further potential foreign investors by networking with all relevant FDI-
related partners: ministries and other government bodies, local authorities, chambers of
commerce etc.
For domestic companies, SIEPA offers services of foreign markets analysis, export business
advices, help in obtaining permits and licenses, companies and sectors promotions abroad and
expert knowledge in recognizing and exercising comparative advantages in export.
SIEPA also provides advisory services to the Serbian government about legislative framework
in the area of foreign investments and export. All SIEPA’s services are free of charge.
One of SIEPA’s goals in software industry is to promote the export of intellectual work from
Serbia. Looking particularly at the Dutch market, the Agency wants to assess the needs of
Dutch companies who decided to offshore their software development. At the other side, they
need to understand what kind of Serbian company would be ideal offshoring development
supplier to them.
3.3 Research Philosophy and Approach
The theoretical part is initially designed by using up-to-date literature on outsourcing and
offshoring and gradually modified according to the knowledge acquired through empirical
findings. Initial theoretical framework was designed as general as possible, in order to be able
to accept and explain facts collected during the research process. The intention was to keep it
as general as possible even after the refinement phases and to make the produced theory
generally applicable.
In the practical part of the research, we learned from the actors of the offshoring at the two
sides what do they experience during the offshoring process. We notice two roles: the one of
an offshoring development client (a Dutch company) and a supplier (a Serbian company).
Each of them will interpret their role in the offshoring processes according to their attitudes,
believes, visions and business interests.

7. 7
On more detailed level, in the process of offshoring there are many specific actors at both
sides. The whole process is actually based on their interaction. The complexity and
uniqueness of situations require specific treatment of each of them. Too quick generalization
may lose the point. The researcher has to understand the mechanisms that lead to the certain
actions and decisions in each particular case. The research clearly adopts interpretivist
philosophy.
The researcher tried to analyze cases together with the actors and to contribute to their vision
of the offshoring process. The idea is that a company accepts the participation in the research
having in mind their own benefit: they can compare their own ideas or practices against the
results the researcher collected during literature study and previous interviews. The essential
element in this communication is the trust and in order to gain some, the researcher also had
to offer what he knows.
The communication and knowledge transfer between the parties depends on researcher’s
knowledge and experience acquired during the research process. In that respect the sequence
of interviews is important, but was mostly sacrificed to the convenience of interviewees’
schedules.
In essence, all of those views and attitudes, not excluding the one of the researcher, are highly
subjective. Moreover, upon those subjective views and attitudes depends the whole process.
In that respect the research adopts subjectivism as an ontological point of view.
The approach of the research is inductive: the researcher had no prepared hypotheses or
theories seeking to prove or abandon them. The goal was to build offshoring models and
explore matching factors.
Certain deductive component can be seen in comparing the companies to the offshoring
model established in theoretic part, but that comparison should not give any grade or
benchmark of the applied practices. Rather than that, the purpose of theoretic model is to offer
a set of patterns that can be recognized in particular situations.
3.4 Research Strategy
The purpose of the research is to explore offshoring software development process from the
Netherlands to Serbia. The researcher looked for insights in the companies, their strategies
and operations and every new-learned fact had been used to correct the direction. In that
respect, this started as a typical exploratory research.
However, soon after literature study and first interviews, findings formed a theoretical
concept that seemed to be very firm and did not change essentially till the end of the research.
In some interviews an easy, early agreement was achieved about theoretical concepts and the
conversation quickly turned towards the detailed analysis. In that respect, the research also
had some explanatory component.
Basic research strategy is the case study. The researcher explored multiple cases trying to
extract common features between them, as well as symptomatic features that may be unique
to certain cases.

8. 8
There is an evident ambition to turn this into the action research, because there is an intention
from the beginning to influence the situation. Also, the sponsor’s interest does not stop with
research conclusions, but spreads over several cycles of improvements, after initial
cooperation establishment.
The problem is the time limit. Since the action research needs several cycles of taking action
based on conclusions and evaluating the effects, it is impossible to perform it in the given
time span. Therefore the strategy of this research is chosen to be the case study, hoping that it
means a beginning of the initial cycle of an action research.
It is already clear that the answer sought is a qualitative one, so the most appropriate method
for collecting primary data would be qualitative interview. The researcher tended to follow
the interviewee, just occasionally reflecting on established theoretical model to get
confirmation of understanding, what led to non-structured interviews. The interviews are
conducted as one-on-one.
3.5 Research Questions/Objectives
The main research question is:
What are elements for a strategic match between a Dutch client company and a Serbian
development service provider in software development offshoring?
The answer to this question should reveal easily recognizable characteristics of a successful,
sustainable cooperation between a Dutch client and a Serbian supplier in offshoring software
development.
3.5.1 Theoretical Framework Research Questions
The theoretical framework of the research has to answer following questions:
How to determine which activities of a client company is possible and beneficial to offshore?
The answer to this question has to give guidelines how to recognize the activities suitable to
be offshored in general and how to determine if offshoring of a certain activity is applicable in
a specific case. By knowing this we can easily spot the offshoring benefits the company is
looking for.
What are the benefits that a client company can get from offshoring and what are the
competitive advantages they can develop by choosing them?
The answer to this question has to define benefits which a client company can get by
offshoring their software development and to point to the link between recognized benefits
and the company’s competitive advantage. In this way we define options that the offshoring
offers to the company and we explain how they should make their choice.
What are the tradeoffs that the company makes by opting for a certain offshoring benefit as a
strategic choice?
The answer to this question has to provide a list of benefits that the company has to give up
and risks that they accept by making one of those choices. These tradeoffs practically define
different offshoring strategies.
What are the links between a client company’s chosen offshoring model and their overall
company strategy?

9. 9
The answer to this question has to give very general market strategy profiles of the client
company, based on recognized competitive advantages and to link them to the defined
offshoring strategies.
What are the corresponding suppliers’ strategies, in particular HRM?
The answer to this question has to give very general profiles of supplier companies, with
focus on their HR strategies. By linking them to the clients’ offshoring strategies, we define
some general guidelines for client companies how to choose their supplier type.
3.5.2 Empirical Framework Research Questions
The empirical framework of the research has to answer following questions:
What are competitive advantages of Dutch client companies and what do they have in
common?
The answer to this question has to provide the inventory of competitive advantages of Dutch
client companies. That will reveal which benefits they seek through the offshoring of software
development.
Which of the development activities do the client companies offshore and what are the
criteria?
The answer to this question has to give insight into the offshoring practices of client
companies. Based on that we can see which competences are considered to be the core ones.
What do the Dutch client companies see as location advantages of Serbia and how do they
match to their business models?
The answer to this question has to show what the client companies found for themselves in
Serbia and in cooperation with their suppliers. That will reveal which benefits they actually
got through this cooperation.
What kinds of relationships are established between the client companies and their offshoring
partners in Serbia and how these relationships fit into their overall strategies?
The answer to this question has to show how clients’ and suppliers’ strategies match. This
will also show how sustainable is the cooperation.
How are suppliers’ employees’ qualities related to clients’ competitive advantages?
The answer to this question has to put in a connection two ends of the story and to show
implications of choices made by offshoring partners.

10. 10
4 Theoretical Framework
Introduction
In this chapter the theoretical framework of strategic offshoring models is developed. The first
part, Strategic Look at Software Development Value Chain (4.1), discusses the disaggregation
of software value chain and dislocation of its activities. It is considered how to recognize core
competencies of a software development company and how to judge which of the activities to
offshore. Further, three models are designed: Cost Saving (4.2), Enhanced Flexibility (4.3)
and Company Expansion (4.4). Each of them represents a set of strategic choices that a
company makes. A summary of the theoretical framework is given in (4.5) and explicit
answers to theoretical research questions are given in (4.6).
4.1 Strategic Look at Software Development Value Chain
4.1.1 Value Chain Analysis
The Value Chain Analysis method brought entirely different perspective to the strategic cost
management. By analyzing their industry’s value chain, companies can position themselves
better and use their competences more efficiently. They can focus on activities that create the
most of superior value. The other activities should be outsourced – the service should be
bought from reliable partner. In order to have the best financial effects, activities are often
outsourced to the low-cost countries. That leads to the geographical splitting – disaggregation
of the value chain.
As Mudambi (2007) states, “this disaggregation is the outcome of firms combining the
comparative advantages of geographic locations with their own resources and competencies
to maximize their competitive advantage”.
Pedersen (2007) depicts the spread of added value
in most modern industry value chains as “Value
Chain Smiley”: the value added rises as the activity
is closer to the beginning or the end of the value
chain (input or output) and falls for the activities in
the middle. He further shows how then the activities
are spread over different locations in different
industries.
Carmel and Tjia (2005) show software development
value chain with linkages placed lower or higher
depending on their “offshorability”. Interesting
enough, we can also recognize the Smiley on their
picture, because activities at the beginning of the value chain (Requirements analysis and
Architecture) and at the end (Integration) are unsuitable for offshoring, while Coding, in the
very middle, is suitable to be completely offshored. They state, further, that “high-end”
activities, that should not be offshored, actually maintain company’s competitiveness.
Value Chain Smiley (Pedersen, 2007)
Value
Added
Output
Value Chain
Input Processing

11. 11
By combining this graph with iterative model of software development (Kruchten, 2007) we
get the following one:
This graph shows not only the suitability of certain actions for offshoring, but also the
intensity of work in each phase of software project. The “coding” of the software –
“implementation discipline” in RUP terminology – takes a number of iterations according to
Kruchten (2007). In that way the graph also shows work quantities (surface) and the duration
of each of the activities. It is evident that the most work intensive and time consuming
activities are exactly those suitable for offshoring.
4.1.2 Core Competencies and Activities Suitable to be Offshored
If the activity is suitable for offshoring it does not necessarily mean that it is also beneficial
for the company to do that automatically. Quinn and Hilmer (1994) think that “… if supplier
markets were totally reliable and efficient, rational companies would outsource everything
except those special activities in which they could achieve a unique competitive edge”. The
only reason, according to them, not to outsource all other activities is a high “degree of
strategic vulnerability” – i.e. a risk of suffering major damage due to the outsourcing partner’s
fault or sudden step out of the deal.
Prahalad and Hamel (1990) call the abilities of the company to perform those special
activities the core competences. In their opinion, core competences have to “provide potential
Requir
e-ments
Archi-
tecture
Coding
Inte-
gration
On
shore
Off
shore
Time
Design Testing
“Common division of onshore/offshore phases”, according to Carmel and Tjia (2005)
Mainte
-nance
Require-
ments
Archi-
tecture
Coding
1st
iter.
Inte-
gration
. . . Coding
nth
iter.
On
shore
Mainte-
nanceOff
shore
Time
Design Testing
Software development value chain with shown onshore and offshore activities

12. 12
access to a wide variety of markets”, to “make significant contribution to the perceived
customer benefits of the end product” and “should be difficult for competitors to imitate”.
In that respect, coding of software is easy to imitate – virtually any professional programmer
should be able to perform a standard coding task within his technical competences. Software
users’ perception of benefits offered is based on implemented functionality – not on coding
techniques. A user is aware of coding only when he encounters software malfunction – then
the programming error is blamed. Clearly, coding in general can be treated as non-core
competence. However, the content written in that code can sometimes contain certain tacit
knowledge that might be the base of another core competence.
At the other side, activities of interviewing users to collect requirements at the beginning of
the value chain and system integration at the end of it contain not only the technical
knowledge of software production, but also the understanding of customer’s industry and,
more specifically, his business model. The synergy of technical knowledge, customer’s
industry and business model understanding is not easy to imitate. Richmond et al. (1992)
emphasize that “… the time a system analyst spends learning about a user department’s
operating procedures, business priorities and decision models is a specific investment.”
Nevertheless, many basic principles of one industry can be applied to some other with minor
modifications – e.g. similar software solutions are used in food industry as well as in chemical
industry, etc. Thus, skills and knowledge used in requirements analysis and solution
integration activities are definitely core competences of a software producer.
Those theoretic considerations are pretty much in line with Carmel and Tjia’s (2005) vision,
expressed through the diagram, which is based on empirical findings.
Opinions are divided about strategic impact and significance of outsourcing. While some of
the authors, e.g. Quinn and Hilmer (1994) and Mudambi (2007), clearly point out that
outsourcing and offshoring are strategic decisions meant to sharpen the competitive advantage
edge, others find a little of strategic significance in it, like Carmel and Tjia (2005): “Unlike a
new product line, or new improved services, offshoring does not constitute a company’s
competitive strategy, since its goal is merely to increase operational efficiency.”
Our standpoint is that deciding whether to offshore an activity or not is a strategic choice and
it has to be made in accordance with company’s overall strategy. Shank and Govindrajan
(1993) say that a company can develop a sustainable competitive advantage only by
controlling cost drivers better than competitors or through value chain reconfiguring – to do
the things differently than competitors. Decision to offshore is definitively the value chain
reconfiguration.
How should a software development company reconfigure their value chain by offshoring?
The question turns actually into: what should be their strategic gain from offshoring? Most
frequent answer is – cost reduction, but some companies are not aware that they can gain
more through strategic match with their offshoring partner.
All main benefits that a software producer may get from offshoring can be classified as one of
those three: cost saving, enhanced flexibility and company expansion. The company willing to
offshore software development must choose one of them – the one that best resembles their
overall strategy. Further analysis will show that it is not possible to compromise this choice.

13. 13
The company will get the maximum of chosen benefit, while managing to have the other two
at acceptable levels. According to Porter (1996) that is a characteristic of a strategic choice.
He says that such trade-offs are essential to the company strategy: “They create the need for
choice and purposefully limit what a company offers.”
We designed three offshoring models, each one of them providing one of those strategic
benefits to the offshoring client company.

14. 14
4.2 Cost Saving Model
4.2.1 Description
Cost saving lies in the very definition of offshoring – moving activities to low-cost countries.
Carmel and Tjia (2005) stress that cost reduction is the idea behind offshoring and “de facto
entry point for the offshore strategy”. Also, they remark that a lot of companies would like to
stay at this stage, perceiving cost reduction as their “strategic goal”, regardless of other
possibilities. In authors’ opinion, the offshoring strategy can later incrementally change and
reform.
Software development companies that choose to focus on cost saving through offshoring
compete in their markets by stressing low price of the developed product. An example of
price playing important role is when such company competes for the projects on tenders. The
prepared offer has to fulfill all prescribed aspects and the price has to be really sharpened to
bit whatever the competition could offer.
In order to pay for the development as little as possible, the client company tends to connect
supplier’s labor costs to the local labor market prices – i.e. to form the price of the performed
development services based on salaries of supplier’s employees. In that case, logical backup
of the supplier would be that the client company accepts the obligation to provide (or at least
to pay for) enough work for given contract period. This shows us the first trade-off that the
client company has to accept: they have got the labor at the lowest price, but they made a long
term commitment to use all agreed capacities.
Concrete arrangements can have different forms, but the essence of the relationship is that the
client company covers all supplier’s costs and adds some management fee on top of that. In
Lampel and Bhalla’s (2008) terminology of models of offshoring relations, “build-operate-
transfer agreement” or “dedicated offshore center” can be recognized as a suitable forms. In
both scenarios the client locks up some supplier’s capacities and uses them during the agreed
period of time. In the first case the fully functional facility is transferred to the client at agreed
moment and in the other it stays in the supplier’s hands.
The client company must have full trust in the supplier or have some other mechanism to
ensure long term cooperativeness, especially in the case of dedicated offshore center. The
build-operate-transfer is nothing more than one of those mechanisms. The client company is
better secured against the strategic vulnerability when it has an option to take the dedicated
offshore center under their own control.

15. 15
4.2.2 Analysis
The value chain graph for cost saving offshoring model looks like this:
First, we see that the complete coding is offshored, because it is considered non-core
competence activity. Keeping any developer in house would not be only a waste of money on
a difference between onshore and corresponding offshore salaries, but would induce
additional costs in coordination and management of distributed development.
Then, we see that all offshore coding capacities are employed all the time, what is already
explained. The third characteristic would be that the design activities are mostly done
onshore: the development plans must be developed to the very detailed level, leaving to the
offshore working force as little space for improvisations as possible. This is important,
because in house competences formally do not cover coding and the company handles the
projects at the level of technical design.
Quinn and Hilmer (1994) point out to the strategic risks that a client company runs into with
the outsourcing. The two applicable for this situation are loss of critical skills and loss of
cross-functional skills. Coding can be non-core competence, but it is anyway critical in the
process of software development – someone must type in all the necessary code to produce
the applications. By completely outsourcing the activity, the company consciously loses this
critical skill. The process of mastering it again to the sufficient level would be timely and
costly. That is why the client company has to have full control over the supplier and avoid any
risk of a sudden break of the relationship.
The other, less obvious loss is the loss of cross-functional skills – those which professionals
acquire during the working process and in everyday interaction. For example, software
architect could change his model under influence of experienced software engineer, or could
get another bright idea inspired by informal chat with her. When they are separated, the
communication between the actors in the development process is more formal and
concentrated on concrete problem – less creative in informal sense. This problem has to be
addressed by regular informal contacts between the offshore and onshore team members and
careful knowledge exchange management.
. . .
Require-
ments
Archi-
tecture
Coding
1st
iter.
Inte-
gration
Coding
nth
iter.
On
shore
Mainte-
nanceOff
shore
TimeDesign
Testing
Offshore software development value chain with cost saving as main benefit
constant

16. 16
Considering supplier’s human resources strategy as one of the most important strategic
aspects for a software development company, the client seeking for cost reduction must have
a supplier that implements adequate cost reduction HRM strategy. Schuler and Jackson (1987)
describe Cost Reduction HRM strategy archetype as the one with fixed and explicit job
descriptions, narrowly designed jobs, short term and result-oriented performance appraisals,
strictly market salary levels and only necessary training. In this way, the supplier will have
employees that do not possess rare or unique skills and would be readily replaceable. This is
what Carmel and Tjia (2005) call “blue collar programmer”. The client company’s problem in
this case could be supplier’s large employee turnover, because every new employee has to
spend some time with the client’s projects to become fully efficient.
Summary of Cost Saving Model
Cost saving model of offshoring is based on large quantity of working hours that a client
company contracts in advance, looking for a bargain price. Consequently, the quality of
workforce employed at offshore location is questionable and supplier’s employee turnover
can be a problem.
Having this in mind, the model is recommended to the companies who are developing large
software projects where a little or no specific expertise is needed. The superior value created
in this way lays in the unbeatably low development costs.

17. 17
4.3 Enhanced Flexibility Model
4.3.1 Description
The model of enhanced flexibility offshoring is used by companies that compete in the market
with their possibilities to act promptly, to produce software quicker than the competition (to
be closer to the market) and to be agile in meeting further customers’ wishes. One illustrative
characteristic of that software is appearance in many flavors simultaneously. A good example
of such software production is gaming industry.
To achieve this, the client company has to make flexible arrangements with the supplier:
access to the pool of skilled developers at a request. This implies that also payments have to
be discrete – based on separately agreed projects. Most likely payment arrangement would be
a kind of a time & material or fixed price contract per project.
We can see now the other side of the cost-flexibility trade-off. The client is ready to pay
somewhat higher price for the service when he needs it, but wants no obligations otherwise.
Because of that, the supplier cannot be dedicated to one client and would look for at least one
more – until his capacities are used 100%. Those two or more client companies would
compete for supplier’s development resources, making in that way a market price for the
service. If we further consider supplier’s pricing scheme and suppose he offers different time
& material prices for different project priorities, we can literally see that the client can choose
to pay more for more flexibility.
Lampel and Bhalla’s (2008) name this offshoring relationship as “fee-for-service”, stressing
as its positive sides absence of setup costs and low financial risk. As the main negative side is
mentioned possibility of cost escalations.
The continuous relation between the client and the supplier in this model assumes more or
less regular flow of client’s requests. From one project to another, the parties would learn
about each other more and more and the teams would cooperate better and better. The
supplier would plan to assign the same developers to new client’s projects and in that way
their relation would continuously grow despite its discrete character.
An important aspect for the client company is supplier’s strategic dedication to the offshoring
development business model. As long as he makes his profit solely on developing projects for
other companies, the client is sure that he can come with a new project and have it developed
for market price. If the supplier has also his own product development, than it shows that his
orientation to develop projects for others is not strategic. He probably sees offshore
developing as a fast cache source, while his long term orientation is in own software
production. Reliability of that supplier is then questionable.

18. 18
4.3.2 Analysis
The value chain graph for enhanced flexibility model looks like this:
The main characteristic of this model is existence and full use of own coding capacities
parallel with offshoring. Own capacities are constantly used and offshore capacities are
engaged based on ad hoc needs.
This situation could be perceived as contradictory to what we have concluded earlier.
Respecting Quinn and Hilmer’s (1994) opinion that non-core competence activity should be
completely outsourced if the degree of vulnerability is acceptable, the company should first
decide if (and which) coding skills are the core competence or not.
As we said earlier, coding of a standard, correctly defined programming task which can be
performed by a programmer with sufficient technical knowledge is considered to be a
commodity. Such standard unit of work offered by different suppliers can be readily
compared. If the task requires more specific programmer’s knowledge (special tools, software
libraries or concepts) the price for such work would be higher. We can still take that for a
commodity, just with a higher price because of lower supply of that specific skill at labor
market.
Sometimes the knowledge needed to produce the code is so rare and specific that it hardly can
be bought. Software companies dealing with very specific software problems are usually
forced to train their programmers to acquire that field specific knowledge. The code produced
in such cases is a sort of a carrier for company’s tacit knowledge. It is per definition a core
competence of the company and obviously cannot be outsourced in any way.
Now when we have both concepts of coding activity – one as commodity and the other as
activity that involves company’s core competences – we can turn again to the example of
game producer and concretize it. Prahalad and Hamel (1990) are talking about a core product.
They define it as a “… tangible link between identified core competences and end products …
– the physical embodiments of one or more core competencies”. Further, they say: “Core
products are the components or subassemblies that actually contribute to the value of the end
products”. For a gaming company that produces e.g. arcade adventures, the core product
would be so called graphical engine – a set of software libraries for rendering and displaying
Require-
ments
Archi-
tecture
Inte-
gration
. . .
On
shore
Mainte-
nanceOff
shore
Time
Design
Testing
Offshore software development value chain with enhanced flexibility as main benefit
Coding
1st
iter.
Coding
nth
iter.
constant

19. 19
objects. This set of software libraries is usually reused in all company’s games – leaf
products, in terms of Prahalad and Hamel (1990).
The development strategies for core products and leaf products are completely different.
While graphical engine is treated as a pillar of the company, constantly extended and
improved, benchmarked with direct competitors to asses company’s competitive advantage,
games are launched as a short living products, with specific market segment in focus. Their
production is fast, close to the market, straightforwardly derived from the core product.
The coding of the core product and the coding of the leaf product should be treated as
completely different activities. The first one is the one that needs core competences and the
other one not. In this situation the company does not have to be afraid of losing critical or
cross-functional skills. The developers of core product will always know how to use it and
make the leaf product out of it, but by offshoring that production the company leaves in-house
developers to the more creative, long term planned development and moves stressful, labor
intensive one abroad.
The same logic can be applied to the other activities that are shown as partially offshorable. In
each case there is a tiny line that makes a part of activity more suitable to be done onshore and
the other part offshore. For example, design is split at functional and technical design.
Functional design is tightly coupled with business logic and intensive communication with
user is necessary during its development. Technical design is made based on functional, needs
more technical than business knowledge and feedback from developers is very important.
Respecting those facts, functional design is hardly offshorable, while technical is. As we have
seen in the cost savings model, there are situations that require that also technical design stays
onshore. There is a similar situation with testing: unit tests – testing of programmers’ work –
are definitely suitable to be done offshore, while testing of business functionality must be
done by people who can judge about it – onshore.
When the client company as the main offshoring benefit sees flexibility and agility and not the
lowest price, the people that produce for them do not have to be the cheapest possible, but
have to be versatile and goal oriented. To achieve that, the supplier has to apply HRM policy
which Schuler and Jackson (1987) describe as Quality-Enhancement HRM strategy archetype.
This strategy is characterized by relatively fixed and explicit job descriptions; high level of
employee participation in work related decisions; a mix of group and individual performance
appraisal; relatively egalitarian treatment of employees with certain guaranties of employment
security and, as very important, continuous, extensive training and development of
employees.
Schuler and Jackson elaborate that this strategy enables higher quality of work by ensuring
highly reliable behavior of employees who identify themselves with the company goals, who
act agile, are flexible and adaptable to technological changes.

20. 20
Summary of Enhanced Flexibility Model
The Enhanced Flexibility model of offshoring is based on flexible access of a client company
to supplier’s development resources. Due to the constant competition for resources with other
clients of the supplier, the client company pays higher price for the service than in the case of
Cost Saving model.
The client company that employs this model should keep essential development of the core
product in-house, while using offshoring as a mean to enhance flexibility by developing leaf
products. Important success factor is that supplier’s workforce is skilled, agile and motivated.
This model is recommended to the companies that have smaller projects (or can split their
large to projects appropriate parts) and can utilize extra flexibility to be closer to the market
by having shorter leaf product development time.

21. 21
4.4 Company Expansion Model
4.4.1 Description
The two previously described offshoring models consider the relationship between a client
and a supplier companies – so outsourcing per definition. In this model we will consider what
a difference is if the client company decides to offshore activities to their own subsidiary.
A model where mother-company founds, staffs, owns and practically operates offshore
company is in literature called captive center (Lampel and Bhalla, 2008; Keida and
Mukherjee, 2009). Lampel and Bhalla (2008) emphasize as main benefits of captive center
over other models: knowledge internationalization, ability to closely control costs and service
level and better focus on learning and innovation. They mention drawbacks of relatively high
setup and fixed costs, risk of internal bureaucratization of the company and geopolitical and
exchange rate risks.
Keida and Mukherjee (2009) see three sources of offshore outsourcing advantages:
disintegration, location and externalization advantages. Value chain disintegration advantages
come from separating complex activities to the lean, specialized components and making each
of them a core activity for a given unit. In that way the company gets modular and flexible
organizational structure. This is very important prerequisite to offshoring or outsourcing.
According to Keida and Mukherjee (2009), location specific advantages are all local
resources, networks and institutional structures that are external to the company. However, it
is good to mention once again Mudambi’s (2007) remark that they are recognized as
advantages just in combination with company’s own resources and competencies.
Externalization is the third step in this process according to Keida and Mukherjee (2009).
They say that main benefits of externalization are co-specialization and organizational
learning. Co-specialization enables both client and supplier companies to do what they are the
best in and organizational learning points to the opportunity for the companies to learn new
skills from their offshoring partners. According to them, if the company internalizes offshored
activities, i.e. if establishes own captive center offshore, that means that they perceive
disintegration advantages as not very important, at the first place.
4.4.2 Analysis
In a way, it is true that a company establishing a captive offshoring software development
center does not necessarily have to walk through determining which of the activities are done
using company’s core skills and which not and does not have to be concerned about losing
critical and cross-functional skills, nor to assess the degree of strategic vulnerability.
However, it does not necessarily mean that the company disregards the advantages of
disintegration. It simply could be that they assessed one of the named risks as too high to
externalize. They decide to exchange it for risks brought by captive center model, named by
Lampel and Bhalla (2008): risk of internal bureaucratization, and greater exposition of the
company to the geopolitical and exchange rate risks.
The list of risks does not end there, unfortunately. This trade-off has also its financial side. In
financial terms, externalization, or outsourcing, is a method of lowering fixed costs in favor to
variable costs with better possibility of variable costs control (Wikipedia). By internalizing,
the company raises operating leverage and thereby also the financial risk, in the case of sales

22. 22
decline. When it goes about small companies, such risk could be very dangerous and exceeds
the benefit of higher profit in the case of sales increase. That can also partially explain the
remark of Keida and Mukherjee (2009) that big multinationals do more often establish captive
centers than small companies.
At the other hand, the list of benefits is also extended. By having full control over the
offshoring center, the company is able to spread specific company culture to it and empower
own development strategy. It is already shown that previous two models already implied
specific human resources strategy archetypes. In that sense, this model offers full freedom.
For example, Innovation Strategy HRM archetype is unlikely to be beneficial to the client
company in cost saving or enhanced flexibility models. Innovation Strategy HRM archetype
(Schuler and Jackson, 1987) is characterized by: jobs that require close interaction among
groups and individuals; performance appraisals that reflect long term and group based
achievements; jobs that encourage employees to develop skills that can be used elsewhere in
the company; compensation system that emphasize internal equity rather than external or
market-based; extensive training and development and broad career paths. According to
authors, these practices make culture with interdependent behavior, oriented towards long
term benefits, encouraging exchange of ideas and risk taking.
If a company finds that good IT professionals are the location advantage of their offshore
destination, captive center would be the best place not only to use their talent and knowledge,
but also to produce it. Such center could turn into the recruitment and development facility for
company’s internally grown experts that could continue career in the same company in the
other country. This reasoning closely explains benefits of captive center named by Lampel
and Bhalla (2008): knowledge internationalization and better focus on learning and
innovation.
Summary of Company Expansion Model
The Company Expansion model is characterized by establishing offshoring development
facility as a subsidiary of the client company. This model does not connect directly any
particular company benefit or competitive advantage with offshoring. The company uses
offshoring location advantages to grow cheaper, empowering in that way their already
achieved competitive advantages.
This strategy should be embraced by companies with ambitions for global growth. It
internationalizes the company per definition and brings all problems that multinational
companies have. Compared to other two models, this one does not help reducing fixed costs
of the company in favor to the variable ones, but does just the opposite. That is also the
biggest risk it bears.

23. 23
4.5 Summary of the Theoretical Framework
Dissagregation is a method of value chain reconfiguration, which companies perform in order
to achieve sustainable competitive advantage. They do that by combining chosen location’s
comparative advantages with their own resources and competences.
The activities in the middle of value chain have the least value added and are considered as
the most appropriate to be offshored. Specifically for software development value chain the
coding activity in the very middle and partially design and testing are good candidates.
However, the decision is not straightforward. Depending on overall company strategy, which
includes the types of projects they compete for and customer approach, the company has to
make a set of strategic choices to form their offshoring strategy. This theoretical framework
distinguishes three models: Cost Saving (4.2), appropriate for large projects with the total cost
as the main focus; Extended Flexibility (4.3), best for smaller projects where agility and
market proximity are the main concern and Company Expansion model (4.4), which should
be chosen by the companies with ambitions to grow a global software development business.
Comparative overview of the three models is given in the following table:
Cost Saving Enhanced Flexibility Company Expansion
Main offshoring
benefit
Low development cost Flexible market approach
Access to quality
employees
Project size Large (20 to 60
developers on project)
Small (up to 10
developers on project)
Arbitrary
Client’s market
strategy
- Tenders
- Low price
- Network, references
- Agility, quality
Arbitrary
Relationship between
the parties
Dedicated offshore center Fee for service Captive center
Offshored activities - coding, completely
- testing, partially
- coding, partially
- part of design,
testing, even
architecture
Most activities can be
offshored, except
requirements analysis and
solution integration
Inherent model risks Losing critical and cross-
functional skills
Possibility of cost
escalations
Internationalization
problems and operating
leverage
Appropriate
supplier’s HR
strategy
Cost Reduction HRM
strategy
Quality-Enhancement
HRM strategy
Innovation HRM Strategy

24. 24
4.6 Answers to the Theoretical Research Questions
This paragraph considers the theoretical research questions (3.5.1) and defines answers to
them, referring to the theoretical model designed in this chapter.
How to determine which activities of a client company are possible and beneficial to
offshore?
General rule is that the activities in the middle of an industry value chain are suitable for
offshoring. When a company wants to offshore their software development activities, the best
candidates are coding, design and testing. The decision which of them (and which part of each
of them) to offshore the company has to make by determining which of the activities do not
need core skills that are the base for the company’s competitive advantage. For example, the
coding activity that needs to be performed by an employee with specific company’s tacit
knowledge cannot be offshored, while coding of a certain module that requires only standard
programmer’s knowledge should be.
What are the benefits that a client company can get from offshoring and what are the
competitive advantages they can develop by choosing them?
The benefits that a client company can get from offshoring are:
• Cost Saving – giving the company a competitive advantage of the lowest project
development price (4.2.1)
• Enhanced Flexibility – giving the company a competitive advantage of agile market
approach (4.3.1)
• Company Expansion – giving the company a competitive advantage of easier and
cheaper access to the large pool of quality human resources (4.4.1)
What are the tradeoffs that the company makes by opting for a certain offshoring
benefit as a strategic choice?
Apart from the fact that by choosing the offshoring model a client company opts for one of
the benefits as the strategic one, giving up of the other two, there are some systematic risks
accepted with each of the choices:
• Cost Saving model – a possibility of losing critical and cross-functional skills (4.2.2)
• Enhanced Flexibility model – a possibility of cost escalations (4.3.1)
• Company Expansion model – a possibility of internal bureaucratization, greater
exposition to the geopolitical and exchange rate risks and rising of operating
leverage (4.4.2)
What are the links between a client company’s chosen offshoring model and their
overall company strategy?
A client company has to choose offshoring model according to their overall strategy. Only in
that way the offshoring benefits will help the company to achieve sustainable competitive
advantage.
• The Cost Saving model fits the best to the companies that develop large software
projects with a little or no specific expertise needed. Such company’s typical way of
winning the projects is by competing in public tenders (4.2.1).

25. 25
• The Enhanced Flexibility model is the best for a company that develops smaller
projects, especially when it is related to the company’s core product. Companies that
use this offshoring model usually get the projects through their network, by
recommendations and references (4.3.1).
• The Company Expansion model is for the companies that decide to internationalize
their operations and to use specific location advantages in the first place as a mean to
grow the company. Their market strategy does not have to have direct link with the
fact that they offshored certain software development activities. Their offshoring
facilities are just expanding their business capacities, empowering their already
achieved competitive advantages (4.4.1).
What are the corresponding suppliers’ strategies, in particular HRM?
By choosing the offshoring model a client company also chooses the type of a supplier
company. Before considering the offers, the client company should already know what kind
of business model their potential supplier should have, what type of business relationship they
are looking for and, as very important, what kind of people are going to work for them.
• A client who adopts Cost Saving model is looking for a supplier who can provide
vast number of developers at low price. The supplier is eager to accept middle and
long term contracts and give discounts on quantity. He is able to train (or acquire in
other means) sufficient number of junior developers to replace leaving staff (4.2.2).
• A client who adopts Enhanced Flexibility model is looking for a supplier company
who develops small projects, is adaptable and agile and sets their development
capacity at disposal to more than one client. This kind of supplier pays special
attention to the quality of their employees, offering them constant professional
advancing and takes care to maintain high employee retention rate (4.3.2).
• A company who adopts Company Expansion model builds their own subsidiary
according to the overall company strategy, company mission, vision and applies all
the company policies to the new subsidiary, with necessary adaptations to local
market and other circumstances. Also HRM strategy follows those lines (4.4.2).

26. 26
5 Empirical Framework
Introduction
In this chapter the empirical framework of the research is presented. In the paragraphs Dutch
Software Development Market (5.1) and Serbian Location Advantages in IT Industry (5.2) the
situation on Dutch and Serbian IT markets is briefly discussed. In the paragraph Empirical
Findings (5.4) are presented the facts acquired during the interviews, analysis and
comprehension of the cases. Empirical findings are linked to the theoretical framework and
empirical research questions are answered in Synthesis and Answers to the Empirical
Research Questions (5.5).
5.1 Dutch Software Development Market
Industry Overview
Dutch IT software and services sector has about 23,5 thousand companies, out of them 14,9
thousand software consultancies. It employs 138 thousand people, out of them 111 thousand
software consultants. In 2008 the market grew about 7%, to the total of €19 billion. (ABN
AMRO, 2009)
These figures show the scale of need that Dutch economy has for custom application
development and software solutions accommodation. The fact that about 65% of companies
are actually self-employments and that only 4% of companies have 10 employees or more,
shows how heavily Dutch software market is depending on external workforces.
According to Dutch Central Statistics Office, ICT services are, with 18%, the second most
offshored economic activity from the Netherlands (Van Gessel-Dabekaussen et al., 2008).
The report further reveals that high-tech companies are leaders in offshoring.
The Need for Offshoring
The tendency of IT offshoring is not only driven by company benefits. It is more and more
proven that it becomes the necessity. Dutch IT market wrestles with several problems that
have obvious solution in offshoring:
Structural lack of qualified IT professionals is well known problem. Dutch economy needs
more IT people than it has at this moment and will need more than Dutch universities can
produce in the future. One of the solutions is to buy needed work offshore.
Growth limits of value added of ICT sector are reached. ABN AMRO experts estimate (2009)
that the value added of Dutch ICT sector will stabilize at about 1,75% of GDP in the period of
next 10 years. ICT industry obviously becomes mature and that necessarily means that it has
to be more and more efficient. Leaning out all activities and offshoring some of them is a
logical move that has to sharpen competitive edge of companies.

27. 27
5.2 Serbian Location Advantages in IT Industry
Industry Overview
Serbia has rapidly growing IT market. In the period 2005 – 2007 it grew from €280 to €460
million. In 2008 it achieved €550 million and estimates say that by 2012 it will be worth more
than €1.15 billion. Out of that number 73% is hardware business, while software and services
take 15% and 12% respectively (SIEPA, 2009).
Many of Serbia’s more than 1300 IT companies are already oriented to international market.
A research conducted by SIEPA in 2008 among 50 biggest of them, with about 2500
employees in total, shows that 68% are in one way or another engaged in outsourcing and
offshoring activities. Combining that with a fact that 80% of respondents offer a service of
custom application development, we can roughly conclude that about a half of the Serbian IT
sector is ready to develop software projects as offshoring suppliers.
The same research showed that Serbian IT companies have enough competences, that they
master modern technologies and are ready to compete in international arena.
Workforce
Serbian IT sector employs about 10000 highly skilled people. SIEPA’s survey from 2008
showed that 70% of them have completed tertiary education (SIEPA, 2009).
Serbian educational system traditionally favors scientific and technical studies. Almost a third
of all university graduates studied one of those disciplines. Serbia has 17 universities: 8 state
and 9 privately owned. IT technology and related sciences are studied in 4 state owned and 3
private ones. Those studies are very popular and they attract the best candidates year after
year.
Serbian universities produce about 16000 graduates a year. Out of that number 2000 are in the
area of IT and computer science. Moreover, about 3000 graduate in related disciplines as
mathematics, electrical engineering and mechanical engineering.
Serbian IT professionals are very motivated. Although their salaries are significantly higher
than average (€900 to €1,800 gross per month), this is not the main motivation factor. Typical
Serbian IT professional is eager to constantly learn, ready to take responsibility and with high
professional ethics.
State Incentives for IT Companies
The state of Serbia recognized the country’s chances in global IT industry and tries to help by
creating favorable climate and different subsidies (SIEPA, 2009):
• Corporate profit tax is one of the lowest in Europe (10%)
• Smaller IT projects are subsidized between €2,000 and €10,000 per new job created
• R&D projects are eligible for state grants
• Tax credits and tax holidays for companies with huge investments
• Stimulation of employments of certain categories of employees: younger than 30,
older than 45, certain minority groups etc.

28. 28
Summary of Serbian Location Advantages in IT Industry
Serbia is very attractive as a software development offshoring location for Dutch companies.
The main advantages are:
• High number of IT professionals, who are well educated, experienced in one
competitive IT market, proficient in English, motivated and with good business
culture.
• Geographic proximity of Serbia and similar business culture
• Awareness of Serbian state and support to the foreign companies willing to offshore
development to Serbia

29. 29
5.3 Context and Method of Research
The research covers all cases of cooperation on offshore software development between
Dutch and Serbian companies – known to the researcher. Interviews are grouped in four
cases:
Case (Paragraph)
Dutch Client Company /
Interviewee
Serbian Supplier Company /
Interviewee
Goran Balaban, Commercial
Director
CASE1
Enigmatry,Tam-Tam–Vega
(5.4.1)
Paul Manuel, Co-owner
Vladan Ostojić, Co-owner
CASE2
Hinttech
(5.4.2)
Bart Omlo, BU Manager
-
CASE3
XXC–
SCICOMP
(5.4.3)
XXC
F.N., Development Manager
SCICOMP
M. S., Owner
CASE4
Levi9
(5.4.4)
Paul Schuyt, CEO
Jan Dolinaj,
Line Manager at Levi9 Serbia
The initial idea was to have interviews in pairs: client – supplier, but the situation proved to
be more complicated. In CASE 1 (5.4.1), Dutch companies Enigmatry and Tam-Tam are
dealing with multiple suppliers from the same pool. Serbian company Vega IT Sourcing is one
of them, who developed projects for both. It appears from the interviews that Vega IT
Sourcing is a typical example of a supplier company that Enigmatry and Tam-Tam deal with
in Serbia.

30. 30
The CASE 2 (5.4.2) is Hinttech – a company with headquarters in the Netherlands and
development center in Serbia. Serbian office is a business unit of Hinttech – not a separate
company. An interview is made with a representative of Dutch part. Because of the way of
working and close contact between Serbian and Dutch teams, there was no real need for
interview with people from Serbian part.
In the CASE 3 (5.4.3), the cooperation of a Dutch company, we named it XXC and a Serbian
company we named SCICOMP is covered by interviews of both sides. The companies wanted
to appear anonym.
The CASE 4 (5.4.4) is about Levi 9. That is the biggest player in the field of offshoring from
the Netherlands to Serbia. Besides an interview with the company’s CEO, a closer look was
took at the offshore center’s team management through a phone interview with a manager of
Serbian office.
The interviews were face to face, one on one. The duration was tempered to be about one hour
and it was so, with a tolerance of plus/minus 10 minutes. The questions asked were as broad
as possible, leaving the interviewee a chance to fill the story with details he/she finds
important.
After about 40 minutes that part of interview was done. The researcher would then briefly
present the theoretical framework and the interviewee was asked to reflect on his story using
the models. Interviewees were very constructive in that respect – some of them even drawing
graphs of their visions or modifying models to cover the situation they have described earlier.

31. 31
5.4 Empirical Findings
Introduction
In this subchapter the facts collected during the interviews will be presented. Interviews are
grouped in cases, according to relations between interviewed companies. Subchapter (5.4.1)
contains CASE 1: Enigmatry, Tam-Tam and their offshoring partner Vega IT Sourcing.
Further cases are CASE 2: Hinttech, given in (5.4.2), CASE 3: XXC-SCICOMP (5.4.3) and
CASE 4: Levi 9 (5.4.4). The first part of every case contains briefly given interview findings,
while the second part are analysis and comprehension of the facts.
5.4.1 CASE 1: Enigmatry, Tam-Tam and Vega IT Sourcing
5.4.1.1 Findings
Enigmatry
Enigmatry was founded in 2005 by a group of four experienced IT professionals. Today it has
fifteen employees. All of them have university degree in computer science or similar technical
discipline. The company offers services of software project development and consultancy in
open-source and Microsoft technologies. The strategic orientation is towards project
development, but still about 20% of revenue comes from consultancy services. The
consultancy is also used as entry point to get the customer known and eventually offer him
project development in the future.
The customers are mostly governmental and semi-governmental organizations in the transport
industry. The way of getting projects is mostly by networking and word of mouth. Because of
the company size and short history, Enigmatry usually does not meet criteria for software
tenders announced by big companies and governmental organizations. The typical size of a
project that the company develops is mostly about €100 thousand.
Enigmatry tries to differ in quality of performance and quality of employees. They target
more complex software pieces as calculation models, estimates and similar, where their
highly trained people can give their best and perform better than eventual competitors.
Important competencies of Enigmatry are: knowing the clients and their business, being able
to effectively translate requirements in functional and technical design, accurate estimate of
the work needed to bring the project to the end and project management.
Enigmatry was willing to experiment with offshoring mainly based on experience of their
fellow-company Tam-Tam. The two companies came to an idea to found a joint venture
offshoring captive center that would serve both companies. Because of the ethnic origin and
culture familiarity of one of the owners of Enigmatry, they decided to try in Serbia.
It appeared not to be so easy: the setup costs were high and investment could be very risky if
not enough projects could be obtained for the development center. At the other hand, potential
employees in Serbia appeared to be (when experienced enough) too independent and self
oriented to be trusted in the long run. They were more interested in freelance relationship.
Both companies were looking exclusively for very experienced people because of the high
quality commitment to their customers. The solution was obvious: use those freelancers on a
fee-for-service basis.

32. 32
Enigmatry now deals with small companies in Serbia with several employees or with
independent freelancers, on project basis. Those small companies are mostly situated in the
city of Novi Sad. Their founders are usually ex-employees of Levi 9, the company that has a
large offshoring center there. As a great advantage of those companies Enigmatry sees
experience working on Dutch projects. They strongly believe that a way of working in those
companies, which is transferred by experience from Levi 9, contributes in a great scale to the
success of the cooperation.
Enigmatry still develops projects with in-house developers, trying to offshore as much as
possible. In order to transfer knowledge about certain customers and their projects to a
supplier Enigmatry sometimes hosts some of the supplier’s employees in the Netherlands,
even for longer periods.
Projects are offshored on fee-for-service basis, and the company finds that modus satisfactory
enough. However, they still consider opening their own captive center if the volume of work
rises. One of the arguments for that is more secure situation with own resources and a
possibility to extend Enigmatry‘s company culture to the Serbian company and thereby have a
better understanding and higher degree of devotion of the developers in Serbia.
Enigmatry emphasizes the motivation of Serbian developers, a high level of commitment to
agreed targets and high quality of deliverables that offshoring suppliers produce. As negative
side they point to the lack of will of Serbian partners, either freelancers or companies, for long
term arrangements. There was a case where Enigmatry offered more secure contract to a
supplier with certain resources commitment from supplier’s side, but the counterpart did not
show enough interest in it.
The risk is always jointly covered. Enigmatry always tries to share the benefits and risks of
contracts they make with the customers with their offshoring partners. For example, if a fixed
price project is agreed with the customer, Enigmatry also offers a fixed price agreement for its
development to the supplier. In both cases the agreement is respected as fair estimate of time
& material with eventual bonus already incorporated. To prove serious project considerations,
Enigmatry usually offers both possibilities (fixed price and time & material) to the customer
for the same project and the customer can choose which of the agreements he likes more.
Enigmatry is satisfied with current offshoring model. There is a wish to secure the position by
long term commitment with some of the suppliers, in a kind of a strategic partnership, but the
management feels no need to rush into it. The strategy for the future is to focus on project
offshoring. Enigmatry will not extend their domestic capacities. The plan is to keep domestic
costs as low as possible, to further specialize in customer focused skills and to put accent on
project development offshoring to Serbian partners.
Tam-Tam
Tam-Tam profile them as the “full service web agency”. They combine web concept design
and technology in their online solutions. They develop web marketing solutions, web
communication solutions, corporate web sites, e-business solutions, portals etc. Beyond the
service of project software development, Tam-Tam usually also operates the solutions on
behalf of the customers.

33. 33
Their customers are mostly big companies – from a few hundred to several thousand
employees. Tam-Tam looks for a diverse portfolio of customers: service oriented, customer
oriented or B2B. The diversity was not intentional at the beginning, but later the company
concluded to keep it as a strategic orientation.
The company competes for the projects in “informal tenders”, where a customer compares the
whole package offered by Tam-Tam with offers from other providers. Tam-Tam does not
compete where very formal tender procedures are conducted.
Tam-Tam insists on customer intimacy and reliable delivery. As a part of customer intimacy
they emphasize extraordinary skill in translating customers’ needs to effective solutions. As
an illustration of their reliability, they say that it happened before that a project came out of
time or budget, but the company is always ready to cover their eventual faults at any cost.
Projects that Tam-Tam develops are between €20.000 and €300.000. Contracts are mostly
time & material for operating phase and fixed price for development.
Tam-Tam came to the idea of development offshoring by strong belief in globalization at one
side and a clear vision that the company has more skills in less strictly defined disciplines
related to a customer then in technical part.
As an important aspect of offshoring partner choice, the company finds cultural dimension.
Admitting that there are companies able to bridge over cultural differences in offshoring,
Tam-Tam finds that it takes certain energy and rather chooses to concentrate it at their key
competences. They find that an offshoring partner with recognizable, Dutch-like mind set and
also with understanding of the Dutch language is highly desirable.
Tam-Tam does not pay too much attention to the offshoring suppliers’ strategies. Actually,
they see dealing with a supplier as a part of project management and they are eager to engage
as project managers people that can bridge those differences. As an example, they have long
cooperation with one company from Rotterdam that offshores development to Eastern
Europe. Tam-Tam is really pleased with that cooperation, stating that it really pays off to have
intermediary of that kind.
Speaking about relations with Serbian suppliers, Tam-Tam highly appraises their experience
with Vega IT Sourcing. They had cooperation in an operations project (maintenance) and in
new development projects. The experience with the first project was excellent with direct
relation, while with the other one the intermediation of Enigmatry for project management
was appreciated.
Tam-Tam is absolutely dedicated to the business model with development offshoring. They
had experience with many suppliers from different parts of the world. Next challenge for the
cmpany is trying to offshore even more – the solution design. That wish comes primarily from
a constant need for bright new ideas.
Vega IT Sourcing
Vega IT Sources (from now on just “Vega”) is founded in 2008 in Novi Sad, Serbia, by two
ex-employees of Levi 9. After 4 years spent in Levi 9 as software developers they felt self
secured enough to start their own company with the business model they have learned from

34. 34
their ex employer. At the beginning they worked for clients they learned to know as
employees of Levi 9. One of their first clients were Enigmatry and Tam-Tam.
This is not uncommon scenario and there are several companies in Novi Sad that followed
this path. Vega today has 10 employees, and develops projects for several clients, most of
them Dutch. They distinguish development and maintenance projects. Maintenance projects
are less intensive but last longer – a year or two, while development projects bring more
intensive work for several months. Contract types for development projects are time &
materials or fixed price and for maintenance projects there is usually guaranteed monthly
amount of hours used by the client. They also plan to offer a “seat model” – to rent certain
employees to the client for agreed period of time for a fixed month fee, but up to now they did
not have such contract.
The projects that Vega develops are mostly specified at functional level. Technical
specification goes up to the level of platform choice. Solution’s technical details are left to
Vega, except graphical design, which is usually very precise.
Vega perceives they outstand from the competition precisely by the quality of service. They
achieve that by superior quality of their employees. In that respect the company tries to attract
the best graduates of computer science who can rapidly grow to a senior level. As an
illustration, recently they employed a fresh graduate with average mark 10.0 and he is already
sufficiently productive.
As another advantage over average Serbian offshoring company, Vega sees their “100%
Dutch company culture”. They follow in all aspects, as close as possible, the model which the
owners brought from Levi 9.
Vega has growth plans, but not at the cost of the quality of their service. In general, they think
that companies who have too much junior staff on a project jeopardize the maturity of work.
Current growth plans are to increase the number of employees to about 20 to 30 in total.
To keep talented and experienced staff, the company offers a series of benefits with emphasis
on salaries a bit higher than the market benchmark. At the salaries scale, the company
established major differences between junior and senior staff – up to several times. As reasons
for this they state that employees are more motivated to learn and work in that way and that
the competition in Serbia does the same.
Strategic plans are turned towards a “strategic partnership”. The owners of Vega plan to find a
strategic partner – a Dutch software company that would buy out a significant part of Vega
and provide it with constant stream of work.
5.4.1.2 Comprehension
Enigmatry
Enigmatry is a small company competing for the projects in the world of big ones. When
somewhat smaller software projects are on the menu, big suppliers may not be interested
enough for them. Even if they get them, they may be focused on more important ones and
those smaller things are done with more junior staff, which can impact quality and delivery
deadlines significantly. This is a chance for a small company that has a reputation of a reliable

35. 35
and skilled partner. Combined with good knowledge of customers’ business, reliability and
technical excellence are the main competitive advantages of Enigmatry.
The company recognized coding as an activity suitable for offshoring. Solution architecture is
also developed offshore, if the supplier knows the customer and if he already successfully
carried out projects before.
Enigmatry finds that skillful, motivated and dedicated IT professionals are the main location
advantage of Serbia. The other mentioned parameters are geographic proximity (the same
time zone) and cultural similarity. Economic facilities as tax reductions and state subventions
are not perceived as important.
Enigmatry quickly learned the lesson about the best relation model with the offshoring
supplier that fits to their strategy. Establishing a captive offshore centre would be dangerous
in financial and management sense for a company of that size with so agile business model.
Their strategic decision not to grow further in the Netherlands shows an intention to reduce
fixed costs as much as possible and to become even more flexible using fee-for-service
offshoring model.
Interesting detail is that the company eagerly accepts fixed price projects form their customers
and also offshores them in the same fashion. Unlike Kern et al. (2002) advocate, this does not
lead to stressed and broken relationship, but at the contrary brings extra motivation to the
supplier’s side. The reason for this is that fixed price is not negotiated in the sense of bargain,
but as a fair estimate that also contains bonus for good performance. The winner’s course as
described by Kern et al. (2002) is typical for highly competitive environments and is unlikely
in European, especially in Dutch business culture.
Enigmatry’s offshoring model fits very much into the Enhanced Flexibility model, although
there is no clear criterion when a project is coded in-house and when it is offshored. Also, if
an employee from a supplier company works onshore, at the client company, for more than a
year, as it happens in Enigmatry, it becomes questionable if he has come for training and
getting close to the customer or as client’s additional work force. The recent decision to grow
exclusively into the direction of offshoring and not to increase the staff in the Netherlands,
points to the conclusion that those deviations from Enhanced Flexibility model are a
consequence of transitional period and that the business model will be further refined.
Indication of a wish to have significant interest in a supplier company in Serbia can not be
counted for a sign that the offshoring model could grow towards the Cost Efficient one. It is
more a need for assurance of a steady relationship. What Enigmatry is looking for at this
moment is a bigger offshoring supplier who would be able to fulfill most of their needs and
commit to the cooperation on a long run.
Tam-Tam
The first remarkable characteristic of Tam-Tam’s business model is that they extend their
activities beyond the value chain of software development. From the input side they advice a
customer, they propose and design a solution on a business level: a web marketing campaign
or an e-business model. At the output side they offer not only maintenance, what would be
normal technical service, but also operating of the developed solution. Their service
encapsulates in a way technical aspects of software development and maintenance. They

36. 36
propose and design business solution that includes software (e.g. web application) and they
deliver the results of that solution.
Tam-Tam’s competitive advantage is obviously in the ability to offer integral business
solution to a customer and to hide from him technical notions of software development and
maintenance. Customers of Tam-Tam are referred as “big companies”. Actually they are
successful companies and organizations which very well recognize their own core
competencies and are willing to outsource their non-core activities to the reliable partner. For
example, a successful company that has no e-business solution and no technical knowledge
nor web experience at all could turn to Tam-Tam for one stop solution. They would propose,
design, develop, deliver and operate the solution on behalf of the customer, who can continue
to be focused on their core business.
Mentioning again Quinn and Hilmer’s (1994) remark that a rational company would
outsource all non-core activities only if the supplier markets would be absolutely reliable, we
can understand why Tam-Tam insists on reliable delivering of a solution at any cost.
Tam-Tam recognizes advantages of different locations and accepts the concept of global
value chain disaggregation, but does not pay full attention to suppliers’ strategies. They also
recognize a need for highly skilled and experienced people who should work on their projects,
but in the other hand they do not want to care too much where that workforce comes from.
Actually, the company tries to take a position in the industry value chain that does not deal
directly with offshoring! They are willing to outsource “project management” to the third
party, considering dealing with an offshoring supplier as a part of project management.
If we compare Tam-Tam’s story to the theoretical framework models, we can say that the
company operates in the environment where projects are developed with most of the
characteristics of Enhanced Flexibility model, but the company itself refuses to profile their
offshoring model. That is understandable, because the company’s core competencies are in
the requirements analysis and architecture – the activities not offshorable in any of the
models.
The advantage of this position is that Tam-Tam could also get a project that must be offshored
according to Cost Saving model. They have to find appropriate local partner who has
experience with that offshoring model and maybe to pay more attention to documentation
because of the project size.
Vega IT Sourcing
Vega IT Sourcing is a typical Serbian offshoring supplier. They are a young company, proud
of their technical excellence, perceiving that as an unbeatable quality. The company began as
an answer to the opportunity, without some real strategic plan or vision. Originality is not
something that they apprize highly: the way of working, management practices and a focus on
the Dutch market are simply copied from ex-employer and successful competitors. Moreover,
they see practices not used by competition risky and unnecessary.
At least they are right that at this moment no experiments are necessary. The fact that
copycats can successfully enter the market and blossom quickly indicates that the market is
still full of opportunities and far from being saturated. That situation is generated by
constantly growing demand for offshoring services from abroad, particularly companies from

37. 37
West-European countries. That growing demand is fulfilled slowly, because highly educated
people cannot be trained or recruited in a short time.
However, Vega will soon meet a growth problem. Enigmatry pointed clearly to the
fragmentation of Serbian offshoring suppliers’ market and to the problem of cooperation with
too small companies – sometimes with several independent freelancers on the same project.
To Vega management, the planned growth to 20-30 employees could look easy, but they still
do not have an answer to the question how to keep a very senior employee who exceeded the
salary scale, what can happen in a few years time.
With more experienced employees grows the danger that some of them do exactly what Vega
founders did – make their own similar company with the same business model and the same
clients – practically to grow into a competition. In that respect, Vega finds that the market
salary and other benefits should work good enough to keep employees from doing so. They
see no need to offer a bonus in a form of company stocks or options, binding the employees in
that way firmer to the company.
Vega plays typical supplier’s role described in Extended Flexibility model: agile software
development and maintenance service, efficient and lean operations and multiple recurring
clients who compete for the resources. Together with technical excellence, those features
assure clients and potential clients that they deal with professional, reliable partner.
It is interesting to remark that Vega copied as much as applicable of Levi 9’s organization,
technical approach and culture, even started with the same clients, but ended up with a
different business model. Even if they wanted, Vega could not imitate Levi 9’s strategic
position: an offshoring facilitator for Dutch companies. They found their own approach and
market position. At the end it resulted in a different offshoring model they belong to.
As the only deviation from Extended Flexibility model could be accounted Vega’s wish to
offer “seat model” of offshoring – to rent an employee or a group of them to a specific client
who would pay monthly fee for them and use their workforce in the way he finds appropriate.
By judging economic reasons – opportunity costs, risks and similar, it may look reasonable.
At the other side, just by considering professional development of a small group of employees
engaged for a client per seat model, we can conclude that this does not fit into Vega’s
company strategy. First of all, the company would not give the best and most senior staff in
this arrangement, because they can contribute much more on projects developed in “fee-for-
service” way. Those employees would need more knowledge transfer and training, but they
would not receive that in natural way, because none of their two companies has interest in it:
client uses them just temporarily while Vega holds focus on projects and may forget those
who are anyway less efficiently used. After contracted period of a year or more, those
employees simply lost professional excellence the company is so proud of.

38. 38
The table below shows how strong the case matches to the dominant model.
Enhanced Flexibility
Model
Matching
Main offshoring benefit Flexible market approach ++
Project size Small (up to 10 developers on project) ++
Client’s market strategy - Network, references
- Agility, quality
++
Relationship between the
parties
Fee for service ++
Offshored activities - coding, partially
- part of design, testing, even architecture
++
Inherent model risks Possibility of cost escalations ++
Appropriate supplier’s HR
strategy
Quality-Enhancement HRM strategy +

39. 39
5.4.2 CASE 2: Hinttech
5.4.2.1 Findings
Hinttnech started in 1997 as an IT consultancy company. At 2003 the company began with
project development for customers. In 2007 they took over a small company in Novi Sad,
Serbia and established captive development center there. At this moment, the company has
120 people: 10 in USA, mostly sales and marketing; 85 in the Netherlands, and 25 Serbia.
About 40% of the revenue still comes from the consultancy, whether employees are sent to
the customer as single consultants or small teams, 40% is from project development and 20%
from maintenance. Project development and maintenance is done in “virtual teams” that
combine people with necessary skills regardless of the location – usually mixed from the
Dutch and Serbian subsidiary.
The company profiled itself at the market as a specialist for implementation of several e-
business technology third party products, but also develops projects in more general
technologies as .NET and Java. Market orientation is to develop firm relationship with
customers in the Netherlands and USA at the firs place, and to develop those projects using
“virtual teams”.
The size of Hinttech’s projects varies from about €200 thousands to €500 thousands and up to
million, when it goes about e-business product implementation, and even broader price range
when it goes about .NET or open source projects. They are moving to the high end of the
market, preferably working for customers with extensive requirements because of the size of
the projects and better recurring rate.
The idea of offshoreing came from the need to offer to their customers project development
for acceptable price, while at the same time getting experienced professionals in the
Netherlands was difficult and expensive. The offshoring land choice was more-less by
chance. Hintech had a vision of nearshoring strategy and did not consider going to India or
China. Available options were in Eastern Europe.
Hintech is looking exclusively for senior developers with agile, open business culture.
However, they are aware of a need to grow some talented juniors in order to secure future
growth of the company. They find place for them in the maintenance projects.
Hinttech has a special view of their offshoring strategy and they specifficaly use the term
nearshoring. They describe the difference between classic offshoring and nearshoring mostly
in the terms of agility: classic offshoring is a process where the client company specifies the
project in details, sends the specifications and waits for the developed project to test.
Nearshoring is constant, agile cooperation between virtual team members in the process of
project development. In the words of Bart Omlo, BU manager: “For us it is not important if a
guy works either in Serbia or at his home in Delft, 500 meters from our office. He is still in
the same virtual team!” According to him this makes the team more flexible and agile.
The decision weather a part of a project is offshored – i.e. if and how many offshore team
members will be included in the project team, is mostly taken together with the client. A
concept phase of the project is always done by Dutch staff. Depending on success and
customers trust in company’s ability to finish the project in that manner offshore developers

40. 40
are added to the team. The sooner the “trust point” is reached, when part of the project is
offshored, the better, simply because of the price of work and freeing up onshore people who
can be moved to new project. The company does not aim to deliberately offshore specific
activities and it is sometimes directed by availability of people with needed skills. So,
depending when onshore part of the virtual team reaches the trust point offshore members are
jumping in. Two extreme cases are when the customer never reaches trust point and the whole
development stays onshore and when the customer already had positive experience with
offshore company and immediately starts the project with them, with minor assistance from
onshore staff.
As a problem to some extent, especially in the agile nearshoring concept where certain virtual
team member should come to the Netherlands for project reasons, Hinttech met the visa
regime that EU had against Serbia.
The majority shares of the company in Serbia (Hinttech Serbia) are in the hands of Dutch
company (Hinttech B.V.) and in all aspects it is treated as a company’s business unit. Serbian
subsidiary is sometimes the owner of the project and direct partner to the customer and in
some cases they lend employees to the virtual team working on a project.
Hinttech will grow Serbian company steadily. It enjoys a reputation of a good employer in
Novi Sad and it could grow quickly. They choose for a gradual growth in order not to
jeopardize the company culture. They will continue giving the employees in Novi Sad strong
feeling of affiliation. Hinttech perceives that feeling of company unity as one of the most
significant differences from other offshoring companies. The company in Serbia can be proud
with the low employee turnover rate.
5.4.2.2 Comprehension
Hinttech is a fast growing company specialized in e-business technology products
implementation. By profiling itself as a leading specialist in the field, the company managed
to move to the high-end of the market and most of their important clients are continuously
coming back with new projects. In that respect, high specialization for e-business technology
products implementation is the competitive advantage of Hinttech.
Time
Quantity
of Work
On
shore
Off
shore
Time
Hinttech’s graph of virtual team work based on customer’s trust: left side – the graph for a project
where customer believes in success of offshoring; right – the same with a suspicious customer
Trust Point
Quantity
of Work
On
shore
Off
shore
Trust Point

41. 41
Although the company works according to the latest software development standards with
clearly recognized development phases and disciplines, the activities are not ranged according
to the value they add to the final delivery, being they are all done in-house. Offshoring criteria
are then formed based on customer’s belief in the success of project offshoring and
availability of people resources offshore and onshore. Although this might look like an
opportunistic behavior without real strategic goal in the scope, it is not so. Hinttech found
their own way of offshoring that favors neither cost saving nor flexibility. They keep the
project development process as transparent as possible for the customer and focus on
customer’s trust rather than benefits that offshoring can bring. At the end, certainly – the more
work done offshore the cheaper the development of the project will be, but that is important
only if the customer is completely satisfied with the results and the flow of the process. Even
if nothing is offshored because of the hesitant attitude of the customer, with the next project
they will be more relaxed. For the recurring customer in time, it is clear that the most of the
project work will be offshored, with full confidence.
The company needs high quality people, both in consultancy and project development, in
order to keep the reputation by the customers. Hinttech finds enough of those resources in
Serbia. By profiling itself as a good employer, the company is able to get the most talented
and experienced professionals on the market. One remarkable fact is that Hinttech finds place
for junior developers in Serbia, although their market strategy also dictates dealing only with
highly experienced professionals. This is an advantage of captive center, an advantage of
possibility to grow own people and invest in the future.
The table shows how the real case matches with theoretic model of Company Expansion:
Company Expansion model
Model
Matching
Main offshoring benefit Access to quality employees ++
Project size Small +
Client’s market strategy Specialization for e-business technology products +
Relationship between the
parties
Captive center ++
Offshored activities
Activities offshored: as much as possible, with
customer’s trust
+
Inherent model risks Internationalization problems and operating leverage +
Appropriate supplier’s HR
strategy
Innovation HRM Strategy +