ODC And Fixed Cost Contract: Pros And Cons Explained

Understanding it outsourcing cost is essential before deciding whether an Offshore Development Center (ODC) is the right model for your project. Many enterprises choose ODC to optimize budget, accelerate development, and access global talent, but cost structure and management approach must be clearly understood.

This guide explains ODC, compares it with fixed cost contracts, analyzes advantages and risks, and breaks down key factors affecting it outsourcing cost. According to recent outsourcing statistics published by Statista, the global outsourcing market continues to grow steadily as enterprises seek better ways to optimize IT spending and improve operational efficiency.

What is ODC?

ODC stands for “Offshore Development Center” and means “lab-type development”. ODC is a type of offshore development that entrusts all or part of the development work to an overseas development company.

Specifically, it means a Fixed Cost Contract in which a development team (= laboratory) dedicated to the client is built in-house, and the system is developed according to the (client’s) instructions for a certain period. Let us briefly describe its characteristics.

• All team engineers will be compensated based on the amount of work they complete, rather than the deliverables they produce.
• The quasi-delegation contract allows the ordering party to manage and instruct the development work without giving up control.
• The contract also allows for changes to be made to the specifications. If the contract period extends beyond the completion of development work, compensation will still be provided.

The contract period of ODC can be as short as 1 month and as long as 1 year or more. If you want to collaborate for a long time, you will have some mutual points with the IT outsourcing team, so if there is good compatibility, there are many cases where you will continue to do ODC with the same partner repeatedly, even after the contract ends.

In short, it will be easier to understand if you think of temporarily hiring a group of temporary engineers exclusively. In reality, Bridge SEs and Product Managers (PMs) are also team members, playing the role of contact with the client and coordinating the team.

We cannot terminate the contract before the schedule simply because development is completed. Payment is based on team size and working hours within the specified period. Therefore, inefficient resource utilization can negatively impact overall it outsourcing cost if not properly managed.

Advantages of ODCs

Next, let’s discuss the advantages and disadvantages of ODC.

The advantages are the following six points.

• Cost reduction
• No hiring or personnel training required
• Changeable specifications
• Speed ​​up development
• Accumulated know-how development
• Multiple projects that can be requested

Let’s take a closer look at each merit.

Read more: What is Offshore Development? How to Succeed in Offshore Development?

Cost Reduction

One of the biggest benefits of using ODC is the significant cost efficiency. Key ODC countries are Southeast Asian countries such as Vietnam, India, China, the Philippines, and Myanmar. Labor costs for IT engineers in these countries are significantly lower than those in Japan, the EU, or developed countries, which is on the rise.

For instance, the monthly labor cost in Japan can be as high as 6000 to 8000 USD. The cost is much lower in ODC countries, only ranging from 1500 to 4500 USD. This makes ODCs a cost-effective option. For example, hiring three engineers from Vietnam’s ODC would cost around 3000 USD per month, even if you can afford higher costs.

As project duration increases, the difference in it outsourcing cost becomes more substantial. This significant gap plays a major role in reducing overall it outsourcing cost for long-term projects.

Even when including PMs and BrSEs (whose cost is 1.2–1.6 times that of engineers), offshore remains highly competitive.

No Hiring or Personnel Training is Required

By using an ODC service, you can hire skilled engineers who are ready to work on your development projects just like your own employees. This is more efficient than hiring and training new engineers in-house. Developed countries are experiencing IT talent shortages, as a consequence, making it difficult to find suitable candidates for development work. However, with an ODC, you can avoid this issue and solve the problems of hiring and training new engineers.

Changeable Specifications

ODC focuses on human resources over a fixed period rather than rigid deliverables. This allows flexibility in changing project specifications.

Agile development, which emphasizes flexibility and adaptability, is increasingly preferred over traditional waterfall models. According to the <a href=”https://www.agilealliance.org/agile101/” target=”_blank”>Agile Alliance</a>, Agile methodology focuses on continuous collaboration and responsiveness to change, helping businesses better manage it outsourcing cost in dynamic development environments.

This flexibility helps companies control unexpected increases in it outsourcing cost during development.

Speed-up Development

Flexible specification changes and access to skilled engineers reduce major revisions and development delays. Time-zone advantages allow near 24-hour development cycles.

Faster delivery improves ROI and reduces overall it outsourcing cost through shorter time-to-market.

Accumulated Know-How Development

Another big advantage of using ODC is that you can accumulate know-how through in-house development. Companies with more experience in ODC have more excellent engineers. There is a lot to be learned by seeing their work up close. It can be an important resource for your company and an opportunity for human resource development.

Multiple Projects That Can Be Requested

ODC will give priority to engineers who are working on projects that they want to further develop, and they will accept multiple requests. If a contract period extends beyond the completion of a project, they are open to outsourcing another project.

ODC is especially suited for research and development fields that are complex and where specifications are likely to change. Relipa has been providing ODC, which caters to Japanese companies and has a team of skilled engineers who are proficient in Japanese and English. They offer full support for custom development projects and are highly regarded for their fast and efficient development processes, as well as their cost-effectiveness. If you are considering developing core systems, software, applications, or Web3-related projects such as blockchain and metaverse, do not hesitate to reach out to us.

Disadvantages of ODCs

Then there are the disadvantages of ODC. Particularly, the following six points.

• Responsibility for quality and delivery is not ensured
• Communication can be challenging
• Personnel selection requires careful consideration
• Cultural differences may cause difficulties
• Short-term development may not be suitable
• Labor costs may be incurred if the development period is extended

Responsibility for Quality and Delivery is Not Ensured

ODC is not a typical contract where a specific deliverable is developed and delivered. Instead, it is more of a request-based development process where a certain part of a project is developed as needed. This can sometimes lead to concerns about a lack of emphasis on quality assurance and adherence to delivery timelines. The extent of this issue can vary depending on the country, company, and engineer involved, and it cannot be said that it is a universal disadvantage in all cases. However, clients should be aware of this possibility and closely monitor how the development task is being managed.

Communication can be Challenging

If you can communicate in foreign languages like English, Chinese, or Japanese, there is no problem, but if the contractor does not have employees who can speak those languages, or if they only understand a few words, the work may not proceed smoothly. In ODC, the BrSE in particular is the key to development. If the BrSE can clearly understand the specifications and fully convey them to the engineers, the possibility of obtaining the expected results will be Personnel selection requires careful consideration

In many cases, ODC will proceed with development work together while having close exchanges for several months to a year. Therefore, the relationship with the client is very important. Even if you are an excellent engineer, if you do not listen to the requests of the ordering party and push your own way, there is a risk that the development work will come to a standstill in the middle. Especially in the case of ODC, there is a high possibility that the specifications will be changed frequently, so it can be said that the success or failure of the project greatly depends on whether or not there is a willingness to flexibly understand the intentions of the client.

For that reason, it is a good idea to have an interview in advance, receive an introduction from a trusted acquaintance, and take measures so that you will not regret it after signing the contract.

Cultural Differences May Cause Difficulties

Even within the same Asian region, there are big differences in culture and customs between Japan and ODC countries. For example, Indonesia has a large Muslim population, and it is customary to pray five times a day. Especially around noon and 3:00 p.m., it is not uncommon for people to prioritize prayer even when they are working.

There are also customs to celebrate the New Year at different times, such as the Spring Festival in China. In Vietnam, the Lunar New Year holiday, called “Tet”, is the most exciting and important event of the year, and it is common sense for companies to take a week or more off. The difference in time zone and culture can be a factor to be considered when working with an IT outsourcing team.

Short-term Development May not be Suitable

ODC will proceed with the execution by forming a team of different developers. Therefore, it usually takes some time to get used to it. There may be language barriers, workflow, the content and timing of reports, etc., which may be confusing at first. Therefore, if the ODC ends in less than a month, the team may not be fully formed before the end, and there is a possibility that it will not make much sense to cooperate. A contract of at least 3 months or longer would be more appropriate for ODC.

Labor Costs May be Incurred If the Development Period is Extended

It is not good if the contract period is too short, but if it is too long for the development content, there is a possibility that the period will be over. In the case of ODC, even if the originally planned development is completed, you must continue to pay remuneration to the engineers until the contract period ends.

For example, let’s assume a case where the unit price per person per month is 300,000 yen and there are 3 engineers. If the contract period is over one month, the cost will be 900,000 yen even if nothing is done. Therefore, if you do not anticipate such a case before signing a contract and devise ways to use up the workload of team members, such as requesting other development work, the cost-effectiveness will decrease.

Difference Between ODC and Fixed Cost Contract

In offshore development, there are “Fixed Cost Contract” and ODC. Fixed Cost Contract is a contract type that outsources the entire development work to the other company. The principle is to deliver the finished product of the decided deliverable on time. The table below shows the differences between ODC and Fixed Cost Contract.

If specifications are clearly defined and unlikely to change, Fixed Cost Contract is suitable. If requirements are evolving or long-term development is required, ODC is preferable.

Choosing the right contract model directly impacts long-term it outsourcing cost and overall project sustainability.

ODC and Outsourcing

Regardless of the industry, there are many examples of using outsourcing (outsourcing) in system development. Outsourcing is basically outsourcing all the development work. Work management, work instructions, and work results are managed by the contracted company. In the sense that you are responsible for delivering the deliverables, it can be said to be similar to an offshore contract development contract.

On the other hand, in the case of ODC, it is a quasi-delegation contract in which the ordering party takes the initiative without leaving everything to the other company. Grasp the progress, manage the work status of the entire team in detail, and if you see a situation that is different from the intention, you will be instructed to correct it immediately. In that sense, it can be said that there is a sense of unity compared to pure outsourcing, even though they are separate companies.

ODC Flow

The flow of ODC is explained in the image below:

Selection of the ODC Company

First, having a trustworthy ODC partner can mitigate the risk of wasting time and resources.

To find a reliable partner, let’s check out the methods below

• Consider a reference from acquaintances
• Attend seminars and webinars
• Search on the Internet
• Utilize matching sites

And so on.

Reripa has successfully served numerous clients through its specialized ODC services for Japanese companies. We are committed to providing cost-effective and fast development solutions, and we encourage you to contact us for a free consultation.

If you are new to ODC, it is recommended to seek a referral from a trusted source to ensure a safer and potentially more cost-effective experience. If referrals are not available, it is essential to consider factors beyond budget, such as the level of Japanese language proficiency, whether the company’s expertise matches the development requirements, and the availability of interpreters and designers, in addition to bridge SEs and engineers.

Preparation of Specifications

In parallel with the selection of ODC companies, clients need to create requirement documents. There are some crucial points that clients should pay attention to.

• What
• Why
• When
• How much

Clients need to thoroughly discuss and ponder whether they want to develop it. In terms of ODC, there may be cases where the specifications are not clarified, like in the Fixed Cost Contract. When doing so, don’t forget to clarify issues such as what is unclear and where the reasons and causes are.

Having clear and detailed specifications or required documents is essential for effective communication with ODC companies. When both parties share the same understanding and work towards the same goal, the success rate of the project is likely to increase. Therefore, it is crucial to put maximum effort into creating detailed specifications. When there are no contradictions in mutual understanding, it becomes easier to maintain the same pace and achieve the desired outcome.

When creating specifications for an ODC project, it is recommended to include, at a minimum, the following elements: a screen transition diagram, an image diagram, a sequence diagram, and a detailed explanation of the layout and operability. With these elements included, it becomes easier to have productive discussions with ODC companies.

However, it is important to note that it may be challenging to achieve 100% adoption of the specifications in the first stage. In some cases, compromises may need to be made, while in others, the performance may exceed expectations. The contractor’s resources and skills may also vary, and there may be situations that require adjusting the budget. Flexibility is key to ensuring a successful outcome.

Development Implementation

Once the specifications or required documents have been finalized, it is important to work collaboratively with the ODC partner to ensure that the development process is aligned with the specifications. However, it is crucial for clients to take the lead and not solely rely on the ODC company to drive the project. It is recommended to have daily meetings with key members at the initial stage to track progress and prevent deviations from the project plan. As the project progresses, it may be beneficial to have meetings every few days a week.

Test/Fix

Once the system is implemented, the ODC company will move on to the testing stage. If the programs run into any bugs at this stage, or the image doesn’t work as expected, ODC company will fix it right away. If the client can’t examine and validate the final delivered product within the contract period, the team will be disbanded, so it will be difficult to make any subsequent revisions. Even if clients want to fix it, they need to renew the contract and pay additional costs. Hence, it is recommended that clients finish the desired phase within the period.

Tips for a Successful Project with ODC

When working with an Offshore Development Center (ODC), businesses can optimize performance and control overall IT outsourcing cost by understanding both potential risks and important success factors. Let’s divide the key considerations into two categories: risks to avoid and points to consider.

Risks to Avoid When Using ODC

“Keep responsibilities clear”

At the beginning stage of the project, it is necessary to clarify the scope of responsibility of both the client and the ODC company.

It is advisable to define in detail and reach a consensus on aspects such as the party responsible for design and implementation, the scope of testing, team members involved, cost-sharing in case of any unexpected project-related expenses, and the post-development support system. It is recommended to document these details and have all parties agree upon them to avoid any confusion or misunderstandings during the development process.

“Don’t focus too much on cost”

Be careful not to fixate on cost and decide to outsource only because the quote is cheap. If the price is too low, there is a possibility that the engineer’s skills are low or the development track record is low. With ODC, there are cases where development stops halfway, and the relationship fades out, resulting in a large loss in terms of cost. To prevent this from happening, consider factors other than cost and try to select a partner from a comprehensive perspective.

“I have limited proficiency in English”.

Limited proficiency in English can be a significant hindrance in ODC. It is crucial to ensure that at least one member of the team has achieved an IELTS score of 6.0 or higher and can communicate and understand effectively by conducting actual conversations with them.

“Losses due to time differences and events”

There is a possibility of incurring losses due to time differences and events. The time difference between the partner countries can sometimes exceed 3 hours, which can be an advantage for development. However, it should be noted that real-time information sharing, inquiries, and urgent instructions may not be possible due to the time difference. In addition, if the project has a short contract period or is urgent, there is a risk of delays in development if it coincides with a long holiday or event. Therefore, it is important to thoroughly research the calendar and business customs of the partner country to minimize the risk of losses.

Points to Consider When Using ODC

“Confirmation of development results”

Before finalizing cooperation, verify that the ODC provider has experience aligned with your project goals. Review previous deliverables and case studies to ensure they possess the required technical expertise. Choosing a qualified partner from the beginning is one of the most effective ways to control long-term IT outsourcing cost.

“Thorough reporting and establishing rules”

Cross-cultural differences and communication barriers can lead to strained relationships in ODC partnerships. To avoid this, it is crucial to have a strict task management system in place and encourage thorough reporting and communication to monitor progress closely. Simply asking for updates is not sufficient. It is important to specify details such as the date, time, and purpose of each meeting. It is also recommended to determine the best communication method for each situation, such as face-to-face video conferencing, chat, or email exchanges, and establish a regular meeting schedule. Sorting out these details according to the participating members and content can also help facilitate effective communication.

“Confirm whether a preliminary interview is possible”

It is highly recommended to conduct preliminary interviews with key personnel such as bridge SEs, engineers, and interpreters. This is because it is impossible to determine whether they can comprehend what you require and to gauge their personality and facial expressions unless you converse with them face-to-face. It is essential to avoid any regrets later on by directly contacting them prior to the commencement of development, to evaluate the overall compatibility and rapport in addition to their technical expertise.

Read more: What you can do with PHP and the 4 Steps of Development with an IT Outsourcing Company

Summary

Managing IT outsourcing cost effectively requires more than selecting the lowest price. Clear responsibility allocation, strong communication, technical verification, and strategic planning are essential for maximizing value and achieving sustainable project success.

At Relipa, we are committed to supporting the development of Japanese companies and have received positive feedback from numerous customers. If you are considering ODC, please do not hesitate to contact us.

Relipa Software

Relipa Co., Ltd. is a Vietnam-based software development company established in April 2016. After two years of growth, our Japanese branch – Relipa Japan – was officially founded in July 2018.

We provide services in MVP development, web and mobile application development, and blockchain solutions. With a team of over 100 professional IT engineers and experienced project managers, Relipa has become a reliable partner for many enterprises and has successfully delivered more than 500 projects for startups and businesses worldwide.

Contact our experts